Residential construction firm Berkeley Group (BKG) announced a major strategic reset in light of the weakening housing market. The company confirmed its FY26 financial targets, but declined to update its FY27 guidance sending shares 15% lower.
Slow market
Berkeley develops brownfield sites in urban areas into new homes for sale and for rent where they are most needed. To do this requires ‘considerable upfront capital investment which in turn requires a stable, predictable and supportive operating environment’.
In contrast, recent years have seen an unprecedented rise in cost and regulation and a fall in consumer confidence. Meanwhile, the new ‘gateway’ process for building approval means a delay of 12 months between planning approval and work starting.
Given this environment and a ‘subdued’ market, the firm has cut costs and restricted land investment to strengthen its balance sheet. However, the Iran war has knocked confidence even further forcing a major adjustment to its 2035 roadmap.
Rethink required
Berkeley has revised its strategy to optimise its land investment and reduce or ‘phase’ work in progress to meet demand. The firm will target an operating margin of between 17.5% and 19.5% and will continue to buy back shares.
Due to rising tax and regulation on residential development, the group will stop buying new plots except through joint ventures. It will focus on ‘optimising’ its existing land bank and development will be ‘commensurate with the development risk’.
Construction will be phased to match market demand and the pace of approvals, to avoid building up unsold inventory. Similarly, the second tranche of BTR construction will be phased ‘as market conditions evolve’.
The firm didn’t update its FY27 targets, although it already effectively lowered guidance last month. Instead, it offered total pre-tax profit guidance of £1.4 billion and ROCE of 11% to 15% from FY27 to FY30.
We were wondering which way Mr Market would vote on today’s update, and the answer is clearly thumbs down. Like us, investors see today’s reset as a lowering of medium-term expectations.
A target of £1.4 billion in pre-tax profit from FY27 to FY30 means an average of £350 million per year. However, existing guidance for FY27 is ‘similar to FY26’, or £450 million, which implies just over £300 million per year from FY28 to FY30.
We have banged on about this not being the time to buy or own housing stocks, so we won’t repeat ourselves. What we would say is watch out for similar announcements from other developers now Q1 is finished.
Read the press release here: https://www.berkeleygroup.co.uk/investors
