Berkeley Group Holdings plc (LON:BKG) has announced its unaudited interim results for the six months ended 31 October 2022.
Rob Perrins, Chief Executive, said:
“These robust results reflect the strength of Berkeley’s uniquely long-term operating model and the enduring appeal of high-quality homes and places within London and the South-East – a region which is the country’s most under-supplied market – in spite of the uncertain and challenging operating environment.
We ended the period in a strong position having increased net cash from £269 million to £343 million and cash due on forward sales from £2.2 billion to £2.3 billion, while maintaining the estimated gross profit in our unrivalled land holdings above £8 billion. Our guidance for the full year is unchanged, as is our shareholder returns policy.
Sales for the six months have been ahead of the same period last year, demonstrating the resilience of Berkeley’s core markets. This includes five weeks of trading since the end of September in which the value of underlying sales has been around 25% lower than the previous five months. Pricing has remained firm throughout.
Our delivery in the period has generated a fantastic mix of social, economic and environmental benefits. £374 million of subsidies have been provided to deliver affordable housing and committed to wider community and infrastructure benefits, which is over 100% of the post-tax profits. This is the highest ever level and supports our conviction that reviving brownfield land within our towns and cities is the most sustainable way to tackle the housing crisis, reenergise the economy and strengthen local communities.
These outcomes have been achieved against an increasingly challenging operating and regulatory environment, which has been brought into even sharper focus by the deteriorating economic outlook as the world comes to terms with the cost of the pandemic, the war in Ukraine and other global events.
While Berkeley is ready and able to invest in new opportunities to increase delivery, we are positioning the business to reflect today’s environment until the conditions for growth are present to support responsible, sustainable investment. Future investment decisions will need to take into account the increase in corporation tax of 6%, the 4% RPDT and the proposed additional building safety levy designed to raise a further £3 billion from the industry.
We are experienced at operating in times like these and will focus on generating value from our existing assets with limited new investment, matching supply to demand and cash generation.
London is the most beautiful and dynamic city in the world but is not currently attracting the necessary investment from private or public sources, including for infrastructure and affordable housing grant, to unlock more brownfield sites and address the systemic under-supply of new homes.
Berkeley will continue to work closely with local partners to ensure each site has an appropriate and deliverable solution and we will continue to work constructively with all levels of Government to address the barriers to complex brownfield regeneration and enable housing delivery on the most sustainable land.
I would like to take this opportunity to thank all of our people for their tremendous efforts and commitment.”
SUMMARY OF EARNINGS, SHAREHOLDER RETURNS AND FINANCIAL POSITION
| Earnings | HY to 31-Oct-22 | HY to 31-Oct-21 | Change per cent | |||
| Profit before tax | £284.8m | £290.7m | -2.0% | |||
| Earnings per share – basic | 200.4p | 201.7p | -0.6% | |||
| Pre-tax return on equity | 18.0% | 19.1% | -1.1% | |||
| HY to | HY to | |||||
| Shareholder Returns | 31-Oct-22 | 31-Oct-21 | ||||
| Share buy-backs undertaken | £110.5m | £34.7m | ||||
| Dividends paid / B-Share payment | £23.3m | £451.5m | ||||
| Shareholder returns | £133.8m | £486.2m | ||||
| Share buy-backs – volume | 2.9m | 0.8m | ||||
| Financial Position | As at 31-Oct-22 | As at 30-Apr-22 | Change | |||
| Net cash | £343m | £269m | +£74m | |||
| Net asset value per share | £29.56 | £28.18 | +£1.38 | |||
| Cash due on forward sales (1) | £2,330m | £2,171m | +£159m | |||
| Land Holdings – estimated future gross profit | £8,158m | £8,258m | -£100m |
(1) Cash due on private exchanged forward sales completing within the next three yearsSee Note 8 of the condensed consolidated financial information for a reconciliation of alternative performance measures
· The value of underlying sales secured in the first half was 2% ahead of the equivalent values secured in the financial year to 30 April 2022 on a like-for-like basis, with sales since the end of September around 25% lower than they were for the first five months of the financial year. Pricing has remained firm throughout.
· On target to deliver pre-tax earnings of approximately £600 million for the year ending 30 April 2023.
· Matching supply to demand and, based upon current trading, now targeting pre-tax earnings of at least £1.05 billion for the following two years (previously £1.25 billion), which is likely to be slightly weighted to the first of these, in line with market consensus and the objective of delivering a sustainable pre-tax ROE of 15% through the cycle.
· Commitment to £283 million (£2.60 per share) per annum ongoing Shareholder Returns up to 30 September 2025 re-affirmed, with next £141 million due for the six months ending 31 March 2023, of which £56 million has already been returned via share buy-backs.
· Maintaining target to be working capital neutral over this and the next financial year.
· 26 of 32 long-term complex regeneration developments in production.
DELIVERING FOR ALL STAKEHOLDERS
· 2,080 homes delivered, plus 251 in joint ventures (2021: 1,828, plus 395) – Berkeley is delivering some 10% of London’s new private and affordable homes – supporting approximately 27,000 UK jobs per annum directly and indirectly throughout its supply chain over the last five years.
· Approximately £374 million of subsidies provided to deliver affordable housing and committed to wider community and infrastructure benefits in the period.
· Industry leading Net Promoter Score (+73.9) and customer satisfaction ratings maintained.
· Supporting nature recovery with 49 developments now committed to biodiversity net gain, which together will create more than 500 acres of new or measurably improved natural habitats.
· Rated “A-” by CDP for climate action and transparency and AAA rated in the MSCI global ESG index.
· A further 77 apprentices, graduates and trainees joined in the period, with 9% of employees in ‘earn and learn’ positions.
A pre-recorded presentation by the Directors of Berkeley on the interim results will be made available on the Company’s website at 11:00 today – https://www.berkeleygroup.co.uk/about-us/investor-information/results-and-announcements.
CHIEF EXECUTIVE’S REVIEW
Purpose, Long-Term Strategy and Capital Allocation
Berkeley’s purpose is to build quality homes, strengthen communities and improve lives, using its sustained commercial success to make valuable and enduring contributions to society, the economy and natural world.
Berkeley is the only large UK homebuilder to align with Government on prioritising brownfield land, as we progress 32 of the country’s most challenging regeneration projects, 26 of which are in delivery. Each of these neighbourhoods is uniquely designed in partnership with local councils and communities and includes valuable public amenities alongside tenure-blind private and affordable homes.
It has been hugely exciting to see more of these complex sites transform into popular, inclusive and low carbon communities, including White City Living, a former warehouse complex, where we have now delivered 840 private and affordable homes, a hugely popular community park, pedestrian routes to Westfield Shopping Centre and an Amazon Fresh convenience store.
At Grand Union we recently joined local residents and councillors to launch a beautiful canal-side public plaza, featuring a restored narrowboat, life-size sculptures inspired by pupils from nearby Alperton Community School and a 5,000 sq ft Community Hub. This regeneration partnership with the London Borough of Brent is transforming the previously derelict Northfield Industrial Estate.
Alongside this, Berkeley’s financial strategy reflects the cyclical nature and complexity of brownfield development, protecting and enhancing long-term value for shareholders and using its development expertise to maximise the returns from its assets, creating the right development solution for each site. Our capital allocation policy is therefore clear and remains unchanged: first, ensure financial strength is appropriate to the prevailing operating environment; second, invest in the business (land and work-in-progress) at the right time; and third, make returns to shareholders through dividends and share buy-backs.
This disciplined approach allows Berkeley to deliver sustainable, risk-adjusted returns over the cycle, targeting a sustained pre-tax return on equity of 15%.
Current position
From the strong trading period that followed the Global Financial Crisis, Berkeley invested in accumulating its unrivalled portfolio of complex large-scale brownfield regeneration sites in and around London, which will sustain the Group’s delivery profile for the next ten years. As investment in the upfront development costs on a number of these sites completes over this and the next financial year, Berkeley’s focus will increasingly be on cash generation. This will provide the optionality to invest further in the business or reassess the level of returns to shareholders, depending upon the characteristics of the prevailing operating environment. Berkeley is targeting being working capital neutral over this period and will only invest in new sites very selectively or in partnership with landowners; such as retailers, utilities, local authorities and housing associations.
In the near-term, Berkeley will focus on matching production on existing sites to demand and delivering its forward sales over the period to 30 April 2025. Beyond this, the current operating environment, characterised by record levels of planning tariff within an increasingly complex and slow planning system, at a time of high build costs, increased regulation and higher corporation tax, alongside the RPDT and proposed new Building Safety Levy, will inevitably continue to see a reduction in supply of new homes in London and the South East. Berkeley’s delivery of new homes will therefore result in a reduction in its land holdings.
While sales prices have been at levels to largely offset increasing costs in recent years, margins may be placed under pressure if these headwinds do not abate sufficiently and as households and businesses come to terms with heightened inflation, increased interest rates and the more protracted recession articulated by the Bank of England in its most recent forecasts.
Shareholder Returns
Berkeley has in place a long-term plan for shareholder returns, based upon an ongoing annual return of £283 million planned through to September 2025, which can be made through either dividends or share buy-backs.
In September, Berkeley paid a dividend of £23 million (21.25 pence per share) which completed the return of £141 million that was due in respect of the six months ended 30 September 2022, with £118 million having been returned via share buy-backs, of which £64 million was returned in the previous financial year and £54 million during this half.
Berkeley has committed to the next ongoing scheduled shareholder return, which is the £141 million in respect of the six months ending 31 March 2023, against which £56 million has been returned via share buy-backs in the first half of the year.
Therefore, the total amount returned via share buy-backs in this period is £110 million across 2.9 million shares, at an average price of £37.61 per share.
The ongoing annual return of £283 million currently equates to £2.60 per share; a 30% increase on the initial £2.00 per share initiated in 2016 following share buy-backs undertaken since that date and the share consolidation in the previous financial year.
Summary of Performance
Berkeley has delivered pre-tax profit of £284.8 million for the six-month period:
| Six months ended 31 October | 2022 £’m | 2021 £’m | £’m | Change % | |||
| Revenue | 1,200.7 | 1,220.7 | -20.0 | -1.6% | |||
| Gross profit | 323.8 | 346.5 | -22.7 | -6.6% | |||
| Operating expenses | (89.9) | (75.5) | -14.4 | +19.1% | |||
| Operating profit | 233.9 | 271.0 | -37.1 | -13.7% | |||
| Net finance costs | (10.6) | (5.0) | -5.6 | ||||
| Share of joint ventures | 61.5 | 24.7 | +36.8 | ||||
| Profit before tax | 284.8 | 290.7 | -5.9 | -2.0% | |||
| Pre-tax return on equity | 18.0% | 19.1% | -1.1% | ||||
| Earnings per share – basic | 200.4p | 201.7p | -1.3p | -0.6% | |||
| Shareholder Returns | |||||||
| Dividend paid / B-Share payment | 23.3 | 451.5 | -428.2 | ||||
| Share buy-backs | 110.5 | 34.7 | +75.8 | ||||
| Shareholder return in the period | 133.8 | 486.2 | -352.4 |
As a result of its forward sales at the start of the financial year and sales rates which have been ahead of last year, Berkeley anticipates delivering full year profits in line with its previous guidance of approximately £600 million.
Berkeley expects its pre-tax earnings for the following two years to be at least £1.05 billion (previously approximately £1.25 billion). This level of profitability is in line with Berkeley’s objective of generating a sustainable 15% pre-tax ROE through the cycle, whilst operating margins are expected to be at normal historical levels.
Housing Market and Operating Environment
Sales
For Berkeley, the value of underlying sales reservations for the current six month period to 31 October 2022 is 2% ahead of the levels secured throughout 2021/22 on a like-for-like basis. As noted in June, sales in this comparative period were back to pre-pandemic levels.
Since the end of September, Berkeley’s sales have been 25% lower than levels experienced for the first five months of the financial year. This is a resilient performance in the context of the current market volatility and reflects the strength and depth of demand in London.
Pricing has remained above business plan levels throughout this period and into November, with cancellation rates rising from early-teens to around 20% in the last couple of months. Berkeley’s sales continue to be split broadly evenly between owner-occupiers and investors.
In line with the strength of the London market during the first half, the Group’s cash due on forward sales stands at £2.33 billion as at 31 October 2022, up 7% on the £2.17 billion held at the recent year-end. This represents the cash due on exchanged private sales contracts which will be collected over the next three financial years and excludes secured sales in St Edward and forward sales to housing associations.
The latest quarterly DLUHC data shows new starts in London for the 12 months to June 2022 of 21,500 (including private, PRS and affordable homes). This remains substantially below both the current London Plan target of 52,000 per annum and the Government’s identified local housing need of 94,000 per annum.
Land and planning
Berkeley has not added any new sites to its land holdings in this period, whilst one long-term site contracted on a conditional basis in Motspur Park has been added to the long-term pipeline.
On the planning front, Berkeley has secured one new consent in the period; at St William’s site in Worthing, Sussex for around 190 homes. We have obtained numerous revisions to existing consents in the period as we continue to progress our sites; most notably at The Green Quarter (Ealing), White City, Hartland Village (Fleet), Hareshill (Crookham) and The Eight Gardens (Watford).
The Levelling Up and Regeneration Bill has continued to evolve as it progresses through Parliament, with a number of significant amendments tabled in recent weeks. We support the Government’s key objectives for reform, which are to further encourage a brownfield first approach, improve the quality of new homes and the new places created, and to better engage communities in the plans made for their area. This does, however, need to be balanced with the societal need for more homes and wider benefits they bring. Consequently, we are concerned that any weakening of the presumption in favour of sustainable development and the status of five year land supply targets will reduce the pace of delivery of new homes. This will create uncertainty, less predictability of outcome and less stability, which will lead to lower investment going forward.
As a brownfield focused developer we welcome the Government’s recent announcement of a review into what further measures would prioritise the use of brownfield land. We will continue to make the case for an efficient, delivery focused, planning and regulatory system that is able to meet the needs of local people through bespoke design led negotiations on strategic development sites, for which we believe S106 agreements remain an essential tool.
Similarly, we have consistently argued that design codes make sense for new additions to existing neighbourhoods, but that where a new neighbourhood is being created it is more appropriate to engage in a bespoke, design led, approach. This will better engage the local community than an abstract conversation, it will maximise the benefits of a site, and ensure new development is built to an appropriate density.
Inevitably during a period of transition there is a pause as stakeholders seek to understand the new system. We therefore hope the reform agenda has now reached a settled position that is able to command broad support in order to create a settled planning environment as soon as possible, providing confidence for all stakeholders.
Construction
Material cost inflation has begun to reduce, but this varies considerably by product, with those which are energy-intensive in their manufacture or in high demand remaining at elevated levels. Labour cost inflation has been benign relative to materials inflation and, despite the ongoing wider inflationary environment for consumers, we do not expect labour costs to substantially increase from this point given the softening outlook for the construction sector.
Overall, despite the fact that high increases in some materials will continue, we expect build cost inflation to start to moderate during 2023 from the current elevated levels which have been between up to 10% across our portfolio on a blended basis for some time.
Berkeley Modular continues to produce the first modules at its modular factory in Northfleet, which will be delivered to Kidbrooke Village during the New Year and is working with the numerous statutory bodies to achieve the various regulatory approvals required for efficient future delivery.
Fire Safety
Berkeley has been very supportive of Government in its determination both to ensure buildings are fire-safe for people to live in and mortgageable so they can move home and re-mortgage their properties when they wish. Berkeley’s focus in this area has been on ensuring its buildings achieve the required EWS 1 form certification for mortgage purposes and it has obtained this on 99% of its relevant freehold buildings.
Earlier in the year, Berkeley welcomed the withdrawal of the Consolidated Advice Note, which had created much uncertainty in this process, and its replacement by PAS9980, a proportionate risk-based approach that has the support of the wider industry. Based upon this approach and assurances from Government about its fair and equitable implementation, Berkeley signed the Developer Pledge. The Pledge commits signatories to take responsibility for remediating life-critical fire safety issues, based upon the PAS 9980 assessment, on buildings it developed over 30 years which Berkeley is fully committed to and progressing. Berkeley is carrying out PAS9980 assessments on all relevant buildings and will undertake any works necessary to address life-critical fire safety issues.
The Pledge also commits signatories to assume responsibility for remediating buildings accepted by Government into the Building Safety Fund and to meet historic funding commitments Government has made on certain of these buildings. It is Berkeley’s preference to take full responsibility for all its buildings and complete any required works ourselves as determined by a PAS9980 assessment as this will speed up the overall process of remediation. There are a number of buildings that Berkeley has been asked to fund where historic funding commitments have been made for works that are not life-critical fire safety issues and we are working through these with the relevant parties.
We are in detailed discussions with DLUHC in respect of the long-form contract that sits alongside the Pledge. It is in the interests of all stakeholders, including leaseholders, local and national government, banks and developers that the long form contract follows the principles of the Pledge and has both a clear standard against which buildings can be assessed for life-critical fire safety issues, and an independent dispute resolution process.
Government has undertaken to ensure that all developers and house-builders are treated equally and that all parties involved in the development process are held to account and pay their fair share. Berkeley believes this is fair and equitable and is fully supportive of this approach. With the Developer Pledge and 4% Residential Property Developer Tax (‘RPDT’) Berkeley believes that UK house-builders have played a very full part in resolving this issue and further levies on the industry would be unjust and constrain delivery and innovation. We are therefore concerned to see recently that Government is continuing with its plans to introduce an additional Building Safety Levy with the target of raising a further £3 billion from the industry, as it will further reduce much needed investment in brownfield regeneration.
Looking forward, Berkeley is ensuring its procedures are compliant with new legislation and is supportive of the Building Safety Act which, together with the actions taken to date, should restore trust and confidence to the housing market, enabling it to operate efficiently, effectively and be fair for all.
Outlook
Berkeley ends the period in a robust position with good visibility of near-term earnings underpinned by £2.3 billion of cash due on secured private sales. We have unrivalled land holdings in the most fantastic city in the world that suffers from a systemic under-supply of new homes, providing resilience to the sales market.
In these uncertain times, Berkeley has a very clear strategy; realising its forward sales, matching supply to demand, adding value to its existing land holdings and pipeline sites, protecting operating margins and focusing on cash generation ahead of the income statement.
We will also continue to serve our customers and the communities in which we work, delivering new neighbourhoods on brownfield land that stitch these neglected parts of our cities back into the local fabric, bringing new amenities and using land in the most efficient and sustainable way.
The delivery of new private and affordable homes is a force for good, generating better health outcomes, new jobs and skills, economic growth and social mobility which benefits the whole of society. Its importance needs to be fully recognised.
Rob Perrins
Chief Executive, Berkeley Group Holdings plc
