Company Reports

Berkeley Group Holdings’ focus on large-scale, capital-intensive brownfield redevelopment projects distinguishes its strategy from its UK homebuilding peers. Brownfield projects involve the redevelopment of land previously used for commercial or industrial purposes. Berkeley is the only UK residential developer that regenerates large, complex brownfield sites at scale and is vertically integrated through the land development, construction, and sales and marketing segments of the residential property development value chain. Operating in this niche, Berkeley typically deploys capital into regeneration sites in built-up areas, with a particular focus on the housing markets of London, Birmingham, and the south of England.

We reiterate the still-significant stock price upside potential for the majority of our UK homebuilder coverage despite the positive homebuilder stock price reaction to a Labour Party victory in the UK general election. Indeed, the election result was widely anticipated given polling in the lead up to the UK general election, which predicted a landslide Labour victory. Nonetheless, the election outcome has emboldened investors, with UK homebuilder stocks leading gains in UK stocks in early trading following the election result on July 5, 2024. Ostensibly, the Labour victory has instilled greater investor confidence that the present urban planning bottlenecks to new housing supply will be appropriately addressed—a key near-term concern that has weighed on UK homebuilder stock prices. Labour’s plans to reinstate support for first homebuyers and to increase supply of other forms of affordable housing are also constructive to the homebuilder industry outlook.

Berkeley Group Holdings’ focus on large-scale, capital-intensive brownfield redevelopment projects distinguishes its strategy from its UK homebuilding peers. Brownfield projects involve the redevelopment of land previously used for commercial or industrial purposes. Berkeley is the only UK residential developer that regenerates large, complex brownfield sites at scale and is vertically integrated through the land development, construction, and sales and marketing segments of the residential property development value chain. Operating in this niche, Berkeley typically deploys capital into regeneration sites in built-up areas, with a particular focus on the housing markets of London, Birmingham, and the south of England.

No-moat Berkeley Group delivered a resilient set of fiscal 2024 financial results, delivering GBP 557 million pretax profit, in line with our expectations. The modest 7% year-on-year decline in pretax profit is pleasing given the significantly challenged UK housing market conditions that prevailed in 2023. Berkeley’s forward order book remains strong, and with the group already 80% sold for the coming year, it has raised its fiscal 2025 pretax profit guidance by 5% to GBP 525 million. However, Berkeley’s unveiling of a new division to focus on affordable rental housing underwhelmed investors.

We maintain our GBX 4,900 fair value estimate and 2024 financial estimates for Berkeley Group, with the no-moat homebuilder confirming it remains on track to deliver against its 2024 and medium-term financial guidance. With Berkeley Group continuing to navigate challenging housing market conditions largely unscathed, we make no change to our full-year fiscal 2024 pretax profit forecast of GBP 576 million, inclusive of joint-venture profits.

Berkeley Group Holdings’ focus on large-scale, capital-intensive brownfield redevelopment projects distinguishes its strategy from its U.K. homebuilding peers. Brownfield projects involve the redevelopment of land previously used for commercial or industrial purposes. Berkeley is the only U.K. residential developer that regenerates large, complex brownfield sites at scale and is vertically integrated through the land development, construction, and sales and marketing segments of the residential property development value chain. Operating in this niche, Berkeley typically deploys capital into regeneration sites in built-up areas, with a particular focus on the housing markets of London, Birmingham, and the south of England.

Our near-term forecasts for no-moat Berkeley Group are largely unchanged as first-half fiscal 2024 performance is broadly tracking in line with our expectations. We expect Berkeley to deliver GBP 547 million in pretax profit in fiscal 2024, aligning with the group’s unchanged pretax profit guidance of at least GBP 1.05 billion over fiscal 2024-25. Berkeley’s confirmation that build cost inflation slowed appreciably during the first half is a positive development and a key takeaway from the result that bodes well for the prospective profit margin outlook for Berkeley and its U.K. homebuilder peers. Still, Berkeley's stock price weakened in early trading—down around 2% at the time of writing—ostensibly in response to commentary surrounding the current challenges that the U.K. urban planning system poses. Presently, U.K. urban planning is proving a bottleneck to the attainment of building consents necessary to quickly replenish Berkeley’s development pipeline.

Berkeley Group Holdings’ focus on large-scale, capital-intensive brownfield redevelopment projects distinguishes its strategy from its U.K. homebuilding peers. Brownfield projects involve the redevelopment of land previously used for commercial or industrial purposes. Berkeley is the only U.K. residential developer that regenerates large, complex brownfield sites at scale and is vertically integrated through the land development, construction, and sales and marketing segments of the residential property development value chain. Operating in this niche, Berkeley typically deploys capital into regeneration sites in built-up areas, with a particular focus on the housing markets of London, Birmingham, and the south of England.

Berkeley Group Holdings’ focus on large-scale, capital intensive brownfield redevelopment projects distinguishes its strategy from its U.K. homebuilding peers. Brownfield projects involve the redevelopment of land previously used for commercial or industrial purposes. Berkeley is the only U.K. residential developer that regenerates large complex brownfield sites at scale and is vertically integrated through the land development, construction, and sales and marketing segments of the residential property development value chain. Operating in this niche, Berkeley typically deploys capital into regeneration sites in built-up areas, with a particular focus on the housing markets of London, Birmingham, and the south of England.

We make no change to our outlook or financial estimates for Berkeley Group Holdings, which reaffirmed its pretax profit guidance of at least GBP 1.05 billion over the fiscal 2024-25 period. We continue to forecast fiscal 2024 pretax profit of GBP 567 million, with Berkeley expecting earnings over the coming two fiscal years to be modestly weighted to fiscal 2024.

Berkeley Group’s focus on large-scale, capital intensive brownfield redevelopment projects distinguishes its strategy from its U.K. homebuilding peers. Brownfield projects involve the redevelopment of land previously used for commercial or industrial purposes. Berkeley is the only U.K. residential developer that regenerates large complex brownfield sites at scale and is vertically integrated through the land development, construction, and sales and marketing segments of the residential property development value chain. Operating in this niche, Berkeley typically deploys capital into regeneration sites in built-up areas, with a particular focus on the housing markets of London, Birmingham, and the south of England.

Berkeley Group continues to traverse the challenging U.K. housing market conditions of 2023 with relative ease. The no-moat homebuilder delivered full-year fiscal 2023 pretax profit of GBP 604 million, broadly aligning with our expectations and its prior guidance. Homeowner demand for Berkeley’s brownfield redevelopment projects has to date remained largely impervious to the cyclical waning of the U.K. housing cycle in 2023, owing to its focus on brownfield redevelopment projects in the undersupplied housing markets of London and southeast England. Indeed, Berkeley retains a robust forward order book—of about GBP 2.1 billion heading into fiscal 2024—that positions Berkeley well as it navigates the cyclical decline in homebuyer appetite and house price headwinds that presently exist. By contrast, 2023 and 2024 are shaping up as a challenging period for volume homebuilders in the U.K. with forward orders falling dramatically in response to the rapid tightening of financial conditions since late 2022.

The U.K. homebuilders continue to screen attractively despite a fresh look at a number of our key U.K. housing market assumptions and consequent revisions to our financial estimates for most of our U.K. homebuilder coverage. Undoubtedly, U.K. homebuilders are staring down a difficult 2023 where profit margins are coming under considerable pressure from a combination of soaring build cost inflation and the effects of a housing market, which has entered a period of cyclical decline—causing home completion volumes to sharply contract and placing pressure on house prices.

Berkeley Group’s focus on large-scale, capital intensive brownfield redevelopment projects distinguishes its strategy from its U.K. homebuilding peers. Brownfield projects involve the redevelopment of land previously used for commercial or industrial purposes. Berkeley is the only U.K. residential developer that regenerates large complex brownfield sites at scale and is vertically integrated through the land development, construction, and sales and marketing segments of the residential property development value chain. Operating in this niche, Berkeley typically deploys capital into regeneration sites in built-up areas, with a particular focus on the housing markets of London, Birmingham, and the south of England.

We make no change to our 2023 financial estimates for Berkeley Group Holdings with the no-moat homebuilder confirming that its performance remains resilient in early 2023 despite the marked uncertainty that currently surrounds the U.K. housing market. While sales have slowed since mortgage interest rates surged in September 2022, we expect Berkeley’s forward order book—which stands at an approximate GBP 2 billion—to assist Berkeley in traversing current ominous U.K. housing market conditions. Berkeley reaffirmed its confidence in delivering about GBP 600 million in pretax earnings in fiscal 2023 and GBP 1.05 billion over the fiscal 2024-25 period—broadly aligning with our forecasts. While our long-term expectations for Berkeley remain unchanged, a time-value-of-money adjustment leads us to lift our fair value estimate by 2% to GBX 4,800.

Berkeley Group’s focus on large-scale, capital intensive brownfield redevelopment projects distinguishes its strategy from its U.K. homebuilding peers'. Brownfield projects involve the redevelopment of land previously used for commercial or industrial purposes that is not currently in use. Berkeley is the only U.K. residential developer that regenerates large complex brownfield sites at scale and is vertically integrated through the land development, construction, and sales and marketing segments of the residential property development value chain. Operating in this niche, Berkeley typically deploys capital into regeneration sites in built-up areas, with a particular focus on the housing markets of London, Birmingham, and the south of England.

While confidence in the U.K. housing market has weakened in recent months, no-moat Berkeley Group remains on track to deliver a resilient performance in fiscal 2023. Berkeley reported fiscal 2023 first-half sales growth of 2% year on year and pretax profit of GBP 285 million despite the significant slowing of housing market activity observed since September 2022. With its forward order book remaining strong, Berkeley remains on track to deliver against its unchanged fiscal 2023 full-year pretax profit guidance of about GBP 600 million. Consequently, we make no change to our financial estimates for fiscal 2023 pretax profit of GBP 585 million or to our GBX 4,700 fair value estimate.

Berkeley Group’s focus on large-scale, capital intensive brownfield redevelopment projects distinguishes its strategy from its U.K. homebuilding peers'. Brownfield projects involve the redevelopment of land previously used for commercial or industrial purposes that is not currently in use. Berkeley is the only U.K. residential developer that regenerates large complex brownfield sites at scale and is vertically integrated through the land development, construction, and sales and marketing segments of the residential property development value chain. Operating in this niche, Berkeley typically deploys capital into regeneration sites in built-up areas, with a particular focus on the housing markets of London, Birmingham, and the south of England.

We lower our fair value estimates for our U.K. homebuilder coverage in the range of 5%-6% with the U.K. government abandoning its prior plan to introduce a range of unfunded and controversial tax cuts. Consequently, the U.K. corporate tax rate is now set to increase as originally planned to 25% in April 2023, up from a current 19%. Therefore, we increase our long-term effective tax rate assumption for our U.K. homebuilder coverage by 6 percentage points to 29%, inclusive of the 4% residential property developer tax, which came into effect in April 2022. Our revised fair value estimates for no-moat Barratt Developments, no-moat Taylor Wimpey, no-moat Persimmon, and no-moat Berkeley Group are GBX 710, GBX 180, GBX 2,400, and GBX 4,700, respectively. We make no change to no-moat Bellway’s fair value estimate of GBX 3,670, having previously incorporated the increase in its effective tax rate into our financial estimates in conjunction with its fiscal 2022 full-year result on Oct. 18, 2022.

The Berkeley Group’s focus on large-scale, capital intensive brownfield redevelopment projects distinguishes its strategy from its U.K. homebuilding peers. Brownfield projects involve the redevelopment of land previously used for commercial or industrial purposes that is not currently in use. Berkeley Group is the only U.K. residential developer that regenerates large complex brownfield sites at scale and is vertically integrated through the land development, construction, and sales and marketing segments of the residential property development value chain. Operating in this niche, Berkeley typically deploys capital into regeneration sites located within built-up areas, with a particular focus on the housing markets of London, Birmingham, and the South of England.