Berkeley Group Holdings plc (LON:BKG) has announced its audited results for the financial year ended 30 April 2020.
Berkeley is the country’s leading place-maker, operating principally in London, Birmingham and the South East. We are a proud UK business specialising in the creation of beautiful, successful and sustainable places where communities thrive and people of all ages and backgrounds enjoy a great quality of life.
CURRENT STRATEGY AND GUIDANCE (reflecting Covid-19)
· The health, safety and well-being of our people, customers, supply chain and the communities in which we work is our main priority. Berkeley quickly adapted its site operating procedures and implemented remote working in line with Government and industry guidance in response to the unprecedented challenges presented by Covid-19
· Continue to invest in Berkeley’s unique operating model, delivering large, complex regeneration sites that few others have the requisite resources, expertise and risk appetite to undertake at scale
· Maintain a pre-tax ROE of at least 15% on a cumulative basis from 1 May 2019 to 30 April 2025, which broadly equates to annual pre-tax profits of £500 million for the six year period
· Commitment to £280 million per annum Shareholder Return up to 30 September 2025 re-affirmed, with next £140 million on track for payment by 30 September 2020, as previously announced
· Return of £455 million surplus capital deferred for up to two years due to the volatility presented by Covid-19 and to provide the Company with the flexibility to invest the surplus capital in incremental new land should opportunities arise which would lead to enhanced shareholder value over the cycle
DELIVERING FOR ALL STAKEHOLDERS
· 2,723 homes delivered (plus 435 in joint ventures) – includes some 10% of London’s new private and affordable homes – supporting approximately 32,000 UK jobs directly and indirectly throughout the supply chain
· Approximately £270 million of subsidies provided to deliver affordable housing and committed to wider community and infrastructure benefits in the year
· Maintained Industry leading Net Promoter Score (+78.8) and customer service ratings
· Sector leading ‘A-‘ score for transparency and action on climate change from CDP
· 35 sites now have net biodiversity gain strategies, which will create approximately 450 acres of new or measurably improved natural habitats on these developments alone
· Delivered carbon positive business operations for a third consecutive year
· Berkeley Foundation wins “Business of the Year” at Third Sector’s 2020 Business Charity Awards
EARNINGS AND SHAREHOLDER RETURNS
· Pre-tax profit now returned to normal level, following successful delivery of a number of Central London developments acquired in the period from 2009 to 2013
· £503.7 million of pre-tax profit (2019: £775.2 million), with EPS down 32.5%, as anticipated
· 3.5 million shares acquired in the year for £130.5 million and dividends paid of £149.8 million
FINANCIAL POSITION
· Net cash of £1,138.9 million (April 2019: £975.0 million), with total liquidity of £1.9 billion via banking facilities of £750 million in place to November 2023
· Net asset value per share up 7.2% to £24.72 (April 2019: £23.05)
· Cash due on forward sales of £1.9 billion (April 2019: £1.8 billion)
· £6.4 billion of estimated future gross margin in land holdings (April 2019: £6.2 billion)
CHAIRMAN’S STATEMENT
These results reflect a strong performance for the year, driven by the fantastic progress of our long-term brownfield regeneration sites, many of which are now maturing into welcoming and popular communities.
The onset of the Covid-19 lock-down in the last five weeks of the period had a significant impact on our operating environment, but Berkeley ended the year in a strong financial and operational position as our resilient business model and agile working culture defined our response. Berkeley’s strategy is designed for a high risk cyclical housing market, so when conditions shift for any reason we have high liquidity, long-term cash flow visibility and highly skilled teams with the grip to effect decisive operational change. This means we are well placed to manage the current period of uncertainty without call on the Government’s furlough scheme or its Covid Corporate Financing Facility.
Our agility mitigated the early impacts of Covid-19 and ensured the safety and wellbeing of our people, customers, suppliers and local communities, which is always our first priority. The speed and precision of the implementation of the necessary far-reaching changes to our working practices showed our highly skilled people and suppliers at their very best.
The suffering and upheaval caused by Covid-19 has given cause to reflect on what really matters and our purpose and contributions to society. As the crisis unfolded, we were struck by the selfless bravery of our front line public services and the kindness and resilience of the local communities in which we work. Our local teams have been part of this heartening response, which has reaffirmed our core belief in the value of community-building and supporting local people.
For us, placemaking is all about people. It’s about turning underused spaces into welcoming neighbourhoods which reflect the local character and where people are connected to each other, proud of their homes and feel part of community life. There is no exact formula for achieving this, but as we are seeing at places like Hartland Village, Woodhurst Park, Kidbrooke Village and Trent Park, we can make fantastic progress when we listen to people and take time to engage them in creating and managing their neighbourhoods.
This year we have further embedded and delivered our approach to net biodiversity gain, with 35 sites now on course to measurably increase natural life. These projects, including Poplar Riverside, White City Living and Southall Waterside, will deliver over 450 acres of new or measurably enhanced natural habitats and become beautiful green landscapes where people can experience the benefits of nature.
I am very proud that this is Berkeley’s third year of delivering carbon positive building operations, thanks to our long- term commitments to reduce energy use and use cleaner sources of power. We have also continued our work towards delivering net zero carbon developments and will continue to engage with Government, the energy sector and our World Green Building Council partners to develop long-term solutions.
Over the last twelve months MHCLG reaffirmed Government’s commitment to improving building safety with a suite of new measures, including guidance on cladding. While we welcome the commitment to improving the building regulation regime, the impact of the latest guidance on mortgage valuations and the ability of fire engineers to provide the necessary certificates for lenders is creating delays in the second hand housing market which seems unlikely to ease until a collaborative regime, based on risk assessment, is established.
The year has seen further progress in developing our own facility for the manufacture of precision made homes using innovative, modern methods of construction. The bespoke machinery is being installed during the coming year prior to production commencing. This really represents the future for our industry, addressing many of the challenges around the supply chain, skills, the environment and quality.
During the year, Berkeley made shareholder returns of £280.3 million, of which £130.5 million was represented by share buy-backs and £149.8 million by dividends. Of the £140.0 million return already announced to be made by 30 September 2020, £6.0 million has been made to date through share buy-backs. The amount that will be returned as dividend will be announced on 13 August 2020 taking account of any share buy-backs in the intervening period.
In closing, I want to express my gratitude and appreciation to our people. They are highly skilled, hugely committed and put our core values into practice every day. This deeply embedded culture is what sets Berkeley apart and ensures we deliver long-term value for all stakeholders.
Tony Pidgley CBE
Chairman
CHIEF EXECUTIVE’S STATEMENT
Summary of Performance
Berkeley has delivered pre-tax profit of £503.7 million for the year. This is from the sale of 2,723 homes (2019: 3,698) at an average selling price of £677,000 (2019: £748,000), reflecting the mix of properties sold in the year. The reduction in profit before tax of 35.0% on the prior year was anticipated and reflects the progressive completion of a number of Central London developments acquired in the period from 2009 to 2013.
Year ended 30 April
| 2020 £’m | 2019 £’m | £’m | Change % | ||||
| Revenue | 1,920.4 | 2,957.4 | -1,037.0 | -35.1% | |||
| Gross profit | 637.4 | 926.2 | -288.8 | -31.2% | |||
| Operating expenses | (167.7) | (157.8) | -9.9 | +6.3% | |||
| Operating profit | 469.7 | 768.4 | -298.7 | -38.9% | |||
| Net finance costs | 0.7 | (2.0) | +2.7 | ||||
| Share of joint ventures | 33.3 | 8.8 | +24.5 | ||||
| Profit before tax | 503.7 | 775.2 | -271.5 | -35.0% | |||
| Pre-Tax Return on Equity | 16.6% | 27.9% | -11.3% | ||||
| Earnings Per Share – Basic | 324.9p | 481.1p | -156.2p | -32.5% | |||
| Shareholder Returns | |||||||
| Dividends paid | 149.8 | 53.0 | +96.8 | ||||
| Share Buy-backs under Returns Programme | 130.5 | 198.9 | -68.4 | ||||
| Shareholder Return in the year | 280.3 | 251.9 | +28.4 |
These results represent a strong performance and are in line with the guidance in place at the start of the year. Robust trading during the year, with improved sentiment and gathering momentum, following the decisive December General Election result, led to consensus for the year increasing to around £550 million. The Company was on track to meet this prior to the Covid-19 lockdown at the end of March when guidance was revised to £475 million, on concern of the ability to complete property transactions during lockdown. Berkeley therefore surpassed its initial expectation in this regard, in spite of the challenges of maintaining production on site and for customers in securing mortgages and achieving legal completions in this period.
From the onset of Covid-19 we have focused on adapting our activities to keep all stakeholders safe, to limit impacts on our ongoing operations and to fulfil our commitments to our customers and partners. Following the Government’s 23 March lockdown instruction, we worked quickly to establish safe protocols for our site operations; always with reference to industry bodies, including the Construction Leadership Council, and Government guidance. After an initial reduction to around 40% of normal production capacity, our activities have been largely restored and stabilised through the effective implementation of these safe working practices and, on average, our sites are currently operating at around 80% of production capacity. This has taken a huge amount of hard work and dedication from our experienced teams and supply chain.
Looking forward, this response to the initial impact of Covid-19 means that the Company is still targeting a cumulative pre-tax ROE of 15% for the six year period ending on 30 April 2025, which broadly equates to average annual pre-tax profit of £500 million. We now anticipate profit delivery in the coming year to be weighted towards the second half of the year in an approximate one third to two thirds ratio. This does assume no further significant disruption from a second wave of Covid-19 or a disorderly end to the Brexit transition period.
Berkeley’s net cash of £1,138.9 million (April 2019: £975.0 million) continues to reflect the measured investment of recent years and is commensurate with the uncertain operating environment. Notwithstanding this, Berkeley has increased the estimated gross profit in its land holdings to £6.4 billion (April 2019: £6.2 billion).
Strategy Update and Shareholder Returns
Berkeley’s purpose is to create homes, strengthen communities and improve lives, using its sustained commercial success to make valuable and enduring contributions to society, the economy and natural world. To achieve this, the Company’s long-term strategy is to invest in opportunities with the right risk-adjusted returns, while ensuring that its financial strength reflects the prevailing macro environment, and to make returns to the shareholders who support the Company to achieve its purpose, through either dividends or share buy-backs.
Since the end of the financial crisis in 2011, the Company has acquired a number of long-term regeneration sites, some of which are now in, or coming into, production and is in the process of bringing forward over 25 large and complex residential-led developments, of which 20 have been acquired since the start of this period.
These sites typically deliver between 1,000 and 5,000 homes and their development can take up to 30 years to complete. Their complexity often means that it can be five or six years before the first homes are delivered. They require significant upfront capital investment, coupled with the unique expertise that the Group has accumulated over the last 20 years and which is embedded throughout its 21 autonomous operating companies. Berkeley is transforming neglected industrial and brownfield land into thriving new communities which deliver quality homes of all tenures, biodiverse open spaces and a mix of shops, offices and amenities for local people.
The successful transformation of these sites is founded on trusted partnerships with local authorities and communities and their development is directly aligned to the Government’s strategy for increasing the supply of good quality homes across all tenures. The Company is now the only developer undertaking major brownfield regeneration at scale in London and the South-East as the increasing risk and complexity of these activities has seen those with lesser expertise and resources leave this area of the market. The delivery of these sites is vital to meeting the housing needs of the country’s towns and cities, while relieving pressure on greenfield land.
Over the last two years construction has begun on over 20 new sites giving Berkeley a firm foundation for delivering, prior to Covid-19, an anticipated 50% increase in production over the next five years, underpinned by a strong opening forward sales position. While Covid-19 has caused short term delays and volatility, it does not change the fundamental strength of the business, which is set up in appreciation of the risks of a cyclical market.
In terms of capital allocation, the priority right now, as it is for all responsible businesses, is on cash conservation to safeguard the business and ensure that it is in the best possible place once the recovery begins. Berkeley has reviewed its business plan, eliminated non-essential expenditure, and re-profiled its sites to focus its work in progress investment on delivering its forward sales and where it has good visibility of the local market. The depth and quality of the land bank means that we will only acquire land with compelling characteristics, where we can add value over the long-term.
Notwithstanding this, Berkeley’s financial strength means that it can continue to meet its purpose by investing in its unique operating model to deliver large, complex regeneration sites and help the country rebound from the impact of the pandemic and to continue supporting approximately 32,000 UK jobs, directly and indirectly, in its business and supply chain for the foreseeable future.
The Company remains committed to its programme to deliver sustainable Shareholder Returns of £280 million per annum up until 2025, but will defer the previously proposed return of £455 million surplus capital for up to two years due to the volatility presented by Covid-19. This will also provide the Company with the flexibility to use the surplus capital to either make enhanced cash returns to shareholders or to invest in incremental land interests, should opportunities arise which would lead to enhanced shareholder value over the cycle. The surplus capital will remain on the balance sheet until the enhanced returns or incremental land investment is made. Incremental land investment will be defined as cash spent on land interests, over and above the cost of land used in the income statement, from 1 May 2020.
In this period of uncertainty, Berkeley will continually review its strategy and has flexibility and optionality within its business model to adjust its plans quickly should market conditions change; always prioritising financial strength ahead of annual profits.
Berkeley is able to make its Shareholder Returns through either share buy-backs or dividends. Since January 2017, when share buy-backs were first introduced, the Company has acquired 14.6 million shares for £514.3 million, at an average price of £35.25 per share and the annual return of £280 million now equates to £2.23 per share; an 11% increase to the initial £2.00 per share. The next six monthly return of £140 million is due to be paid by 30 September 2020. Of this £6.0 million has already been made via share buy backs. The amount to be returned as dividend will be announced on 13 August 2020 and paid on 11 September 2020 to shareholders on the register on 21 August 2020, taking account of any further share buy-backs in the intervening period.
Housing Market
Going into the lockdown period Berkeley was experiencing a stable and satisfactory trading environment. Sales for the 12 months were some 10% ahead of the prior year, with sentiment buoyed by the certainty brought by the decisive December 2019 General Election result.
This momentum also reflected both the desirability of Berkeley’s homes in under-supplied markets and increased launch activity with a number of new developments coming to the market in 2019/20. These included Grand Union in Brent, St William’s King’s Road Park and The Cottonworks in Finsbury, Royal Exchange in Kingston and a number of developments in the South East including Abbey Barn Park in High Wycombe, Huntley Wharf in Reading, Hollyfields in Royal Tunbridge Wells, St William’s Courtyard Gardens in Oxted and Lumina in Camberley. In addition, St Edward agreed to dispose of 190 retirement living apartments at Royal Warwick Square, Kensington, through a forward sale agreement to a retirement living provider.
Pricing remained firm throughout the financial year and Berkeley secured prices above its business plan levels, broadly covering any cost increases.
Sales in April and May reflected the impact of lockdown and were around 50% below normal market conditions, with pricing remaining above business plan levels. This is a good result given the very significant disruption to the sales and home moving process during this period. As the economy gradually re-opens we are seeing activity increase, but it is too early to determine where demand will settle over the coming months.
Fundamentally, this remains a good time to purchase in our markets of London and the South East where supply remains well below underlying demand. With interest rates at historically low levels and good mortgage availability, following a temporary interruption as the UK entered lockdown, affordability levels are high for those who have a deposit; particularly when compared with the cost of renting. For those who can look through the prevailing short-term uncertainty, there are opportunities for long-term value.
It will be important to see what measures Government puts in place around property taxation, the speed and cost of planning and its own direct investment in the sector (including Help To Buy), as this will play a significant part in determining the pace of recovery in a sector that can play a leading role in the recovery of the wider economy.
The Group’s cash due on forward sales at 30 April 2020 is at £1.86 billion compared with £1.83 billion a year ago. The cash due on these forward sales will be collected in the next three financial years and it excludes sales of affordable housing and sales by our joint ventures. Berkeley’s sales continue to be split broadly evenly between owner-occupiers and investors, with overseas customers continuing to see value in the London market. Help To Buy reservations accounted for a net 290 sales in the year, including joint ventures.
Berkeley has added six new sites to its land holdings in the year, which includes three in our joint ventures. In London, the sites are in Old Kent Road in Southwark where we have completed a challenging land assembly and achieved a resolution to grant consent for up to 1,300 new homes, a site acquired conditionally in Brentford where we will be working to deliver a scheme of over 1,000 new homes (St Edward) and in Camden where we will be providing over 600 new homes. Outside London, we have acquired a site unconditionally in Tonbridge, Kent for around 150 new homes and in the St William joint venture we have conditionally contracted sites in Brighton and Worthing.
These new sites are fantastic additions to our land holdings and provide Berkeley with the opportunity to add value over time. We continue to appraise new land opportunities, but in the current environment with heightened risk, a key factor will be the extent to which both vendors and planning authorities recognise the development risk. This complexity means acquiring and bringing forward new sites remains challenging and a slow process, however, Berkeley is in a strong position having brought through planning and into development a significant number of long-term schemes in the last few years.
On the planning front we have secured eight new consents in the year, including St William’s development in Poplar for up to 2,800 new homes and the former Horlicks factory redevelopment in Slough for 1,300 new homes, and we also obtained 58 revisions to existing consents.
Build cost rises continued at around 4% until the end of 2019. From the beginning of this calendar year build costs have been neutral. As the UK emerges from lockdown, and we assess medium-term demand levels, we anticipate further deflationary pressure on costs in the short-term as activity levels are uncertain.
Our Vision
Through the ‘Our Vision’ strategy for the business we aim to generate long-term value and have a positive impact on our employees, customers, the environment and society.
The strategy has now been in place for a decade and we have set commitments every two years under our five strategic focus areas: Customers, Homes, Places, Operations and Our People. The achievements and advances set out below are now embedded in Berkeley’s day-to-day operations and, during the coming financial year, we will put in place a new set of stretching targets for the future. Performance highlights include:
· Putting customers at the heart of our decisions: We maintain an Investor in Customers Gold rating across all operating companies. Our Net Promoter Score of 78.8 (on a scale of -100 to +100) and Recommend To A Friend score of 98.5% are both significantly higher than the industry averages of 39 and 89%, respectively (HBF, March 2020 figures).
· Taking action on climate change: We incorporate adaptation measures for future weather patterns into the homes and developments we build and are the first homebuilder to produce zero carbon transition plans for all new developments. These will enable the homes to operate at zero carbon from 2030, taking into account how the design, specification and infrastructure we provide can reduce the carbon emissions of home owners both now and in the future. We have maintained our award-winning carbon positive approach within our operations since 2017/18, and received a sector leading ‘A-‘ score for transparency and action on climate change from CDP.
· Building communities: Our projects are large scale and long-term, giving us greater scope to involve local people, understand their priorities and make lasting contributions to the local community’s strength, wellbeing and quality of life. This enables us to create welcoming and inclusive neighborhoods with homes of all tenures and a mix of beautiful public spaces, natural landscapes and amenities that bring people together to enjoy community life. Once residents start to move in we use Community Development Plans to get neighbours talking and create social connections across the wider area. We have now trialled a Social Value Toolkit on three sites, which helps our teams to quantify and maximise the social benefits of our holistic regeneration and placemaking strategies.
· Pioneering approach to nature: Our leading approach to achieve a net biodiversity gain on each and every site we develop has been commended by Natural England and echoed in the Government’s Environment Bill which sets out the intention to mandate net biodiversity gain for new developments. We have committed to create or enhance around 450 acres since we implemented the commitment. Nature is just one area for which we were recognised as Sustainable Housebuilder of the Year at the Housebuilder Awards 2019.
· Championing health, safety and wellbeing: Our latest 12 month rolling Annual Injury Incidence Rate (AIIR) is 1.17 reportable incidents for every 1,000 people working on our sites and in our offices (2019: 1.14). This is testament to the dedication of our teams in focusing on behavioural safety in addition to adhering to stringent standards. This year we have developed a network of more than 220 mental health first aiders and have signed up to the Building Mental Health Charter and Framework.
· Considerate construction: We are proud to run our sites with consideration to local communities and the environment. Our 12 month rolling average Considerate Constructors Scheme score of 43/50 is significantly above the industry average for the same period (37/50) and demonstrates the care we take on each development under construction to limit our impact on our surroundings.
· Nurturing careers and improving the industry’s image: A focus on emerging talent as a means of helping to address the industry skills shortage has resulted in an increase in the proportion of our workforce being an apprentice, graduate or training (9% in 2019/20). The REACH Apprenticeship Scheme was named CITB’s Large Apprentice Employer of the Year 2019 and we held the fourth Berkeley Group Apprenticeship Awards in autumn 2019 to celebrate the efforts of our supply chain, who supported more than 500 apprentices working on our sites during the year.
· Promoting diversity and inclusion: We continue to prioritise and promote diversity within our workforce and the wider industry through our Diversity and Inclusion strategy. Measures include an enhanced maternity policy, in-house diversity awareness training programmes, recruitment and training programmes targeting underrepresent groups and expanding our partnership with Women in Construction (WIC). This is an area upon which we will continue to focus.
The Berkeley Foundation
The Berkeley Foundation (the “Foundation”), a registered charity, works in partnership with the voluntary sector to focus the skills, resources and fundraising efforts of the Berkeley Group on helping young people overcome barriers, improve their lives and build a fairer society.
Performance highlights from the year include the launch of a new £350,000 funding programme to support young women from marginalised communities into work, extending our Super 1’s disability cricket partnership with the Lord’s Taverners and awarding £200,000 in emergency grants to support our local charity partners to maintain their vital services in the wake of Covid-19.
Over the course of the year the Foundation committed £3 million to good causes across London, Birmingham and the South of England, supporting more than 4,600 people through its programmes and partnerships. This contribution was made possible through the generosity and commitment of Berkeley Group staff, with 63% of our people directly contributing to the Foundation and volunteering more than 10,000 hours of their time. Berkeley Group maintained its Diamond Payroll Giving Award in 2019 and the Foundation’s impacts were recognised with four major accolades at the Third Sector Business Charity Awards, including the Corporate Foundation award and the overall Business of the Year prize.
Outlook
The UK economy has experienced almost four years of uncertainty since the referendum on leaving the European Union in 2016. While the decisive December 2019 General Election result saw an improvement in sentiment at the start of the year, the risks and opportunities around the nature of our future trade agreements with the EU and other countries still remain. Covid-19 has now introduced a new set of unprecedented challenges and is indiscriminately questioning the resilience of individual sectors and companies in the most searching way.
Berkeley starts the coming year from a position of relative strength, with net cash of £1,138.9 million, forward sales of £1.9 billion and an estimated £6.4 billion of gross profit in our land holdings. Our unique operating model, with financial strength and agility at its heart, has enabled us to act quickly to review our business plan in light of the risks presented by Covid-19 and continue investing in our brand, delivering homes on our large, complex, regeneration sites, putting people at the heart of placemaking.
This puts Berkeley in a position from which it can continue to deliver for all its stakeholders during these unprecedented times, helping the country rebound from the impact of the pandemic and to continue supporting approximately 32,000 UK jobs, directly and indirectly, in its business and supply chain for the foreseeable future.
Underpinning this investment for Berkeley, is the under-supply of quality new homes in London and South East. Beyond the immediate tragic human impact, Covid-19 will undoubtedly have a profound impact on how we work, how we live and how we spend our leisure. Berkeley’s focus on the quality of life on its developments, prioritising nature, connectivity and the well-being of its customers will be an advantage as the market recovers. London remains a fantastic global city and with interest rates at an all-time low, the cost of buying a home for those who can afford a deposit is low, compared with the alternative of renting.
Housebuilding and construction can play a vital role in the broader economic recovery following Covid-19. This will require Government support, similar to that seen following the 2008/09 financial crisis, including: the reversal of the property tax increases seen since 2014; a reduction in the bureaucracy and cost of planning; and direct investment into affordable housing.
In closing, it is important to return to the human cost of this terrible pandemic and our first priority remains the health, safety and wellbeing of our people, our customers and our supply chain, whose response over recent weeks has been remarkable, and I sincerely thank them all.
Rob Perrins
Berkeley Group Chief Executive
