Berkeley Group issued their preliminary results this morning (18/6/2014). For those holding housebuilders shares (like this writer), they are worth commenting on perhaps as investors in such companies seem to be getting twitchy. With Mr Carney hinting that interest rates may rise sooner than expected, house price inflation powering ahead while general inflation remains low, and politicians criticising the Government “Help to Buy” scheme, one can understand why the share prices of many builders have fallen back from their peak.
For example Berkeley peaked at 2777p in February but is 2260p at the time of writing, i.e. down almost 19%, with the results announcement not having any immediate impact. Indeed the financial figures were much as expected.
Berkeley may be of particular concern because they are focussed on expensive developments in London (average selling price last year of £423,000) and people view the London market as particularly over-blown, with lots of foreign buyers allegedly buying “off-plan” and then not occupying the property. This is seen potentially as a target for political action in future because of the shortage of housing for occupation by Londoners. The increase in average selling prices has certainly enabled Berkeley to generate higher profits (up 40% last year) with diluted earnings per share up 34%.
House builders share prices have a strong seasonal effect, and are also cyclical as the housing market is driven by boom/bust in the general economy, and Government interference on interest rates. As Chairman Tony Pidgley says in the results announcement: “The Board is confident that Berkeley has the right plan to deliver long-term sustainable success, but remains alert to the inherently cyclical nature of the property market and the uncertainty surrounding future tax policy and political decision-making. Monetary policy and the financial stability of banks, which is currently a concern of regulators, are both factors influencing the housing market in the long-term. Provided any future increases in interest rates or regulation of mortgages are matched with future wages growth as the economy expands, the prospects for the housing market remain positive.”
Looking ahead, it does seem that investors are getting nervous after a very strong run in the share prices of builders in recent years. The prospective p/e for Berkeley is now less than 10. But the company says it is on target to return £1.7bn to shareholders by 2021, while providing “a sustainable business thereafter”. The current market cap of the company is only £3bn. Is the share price too low based on the fundamentals, or is the market simply thinking ahead?
Investors Chronicle reported on Bellway in its edition last week. They came to the conclusion that it “is just too cheap” after noting its high return on capital, virtually no debt and strong margin improvement. Indeed this is typical of many housebuilders. They used to be highly geared operators with high fixed costs and low margins. With borrowings to finance large land banks, they were always vulnerable to sales declines. Whenever there was low interest rates and a boom in house buying, they geared up production and then fell flat on their face when business dropped off. But the picture now seems somewhat different. They seemed to have learned to be more conservative about raising production while enjoying the benefit of selling prices rising faster than costs. So perhaps this time it is different. Trying to predict with certainty what might happen is not easy, but with companies likely Berkeley and Persimmon actually returning cash to shareholders in a substantial way, this should surely minimise the risks.
Roger Lawson
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