A housing market bust may be coming - but this builder can ride it out




  • In Business
  • 2022-07-03 04:00:00Z
  • By The Telegraph
house building development
house building development  

Housing market booms and busts are nothing new. Just like any other asset, houses have not experienced an uninterrupted rise in value over recent decades.

Indeed, values slumped by 19pc between September 2007 and March 2009 as the global financial crisis gathered pace. And, while their 12pc fall between September 1989 and October 1992 amounted to a more gradual decline, house prices did not fully recoup their losses until April 1997.

Today, a wide range of investors, commentators and industry experts are lining up to proclaim the beginning of the next housing market bust following price growth of 22pc over the past two years. Rising interest rates, a weakening economic outlook and the cost of living crisis are likely, in their view, to severely inhibit, and even reverse, recent rampant house price growth.

The stock market has certainly become less sanguine about the prospects for housebuilders such as London-focused Berkeley Group. Its shares have fallen by 22pc since the start of the year and now trade on a price-to-earnings ratio of just 9. This suggests they offer capital growth potential when market conditions eventually improve.

After all, there remains a severe imbalance between housing demand and supply that successive governments have failed to address fully. Britain's population increased by 324,000 a year between 1989 and 2019. Over the same period, annual housing starts averaged 183,000.

Even a period of reduced demand caused by present economic challenges may be insufficient to correct a long-standing undersupply of new homes. Indeed, population growth is expected to average 210,000 a year between now and 2030.

Should house prices experience a temporary fall, as is widely predicted, Berkeley is in an excellent position to survive. Its net cash of £269m may even allow it to improve its market position relative to less financially stable peers through purchasing land at more attractive prices.

Of course, it is under no pressure to do so because, aided by recent acquisitions, it has £8.3bn of estimated future gross margin in its land holdings. This means it can be extremely selective in the land it chooses to buy over the next few years.

Furthermore, it delivers around 10pc of London's new private and affordable homes. This solid foothold, when combined with a long-term outlook, offers it a distinct competitive advantage over more short-termist rivals. It can capitalise on brownfield redevelopment opportunities, which tend to be profitable but complex.

Indeed, the company's latest full-year results released at the end of last month highlighted its relatively consistent financial performance. It expects to continue this trend by generating annual pre-tax profits of at least £600m over the next three financial years.

As a result, it plans to return £282m to investors per year through dividends, share buybacks or both. This amounts to 254p per share, which equates to 7pc of the current share price. Following its recent share price decline, a share buyback programme could have even greater long-term appeal to investors.

Since we recommended them in this column in August 2019, Berkeley's shares have fallen by 6pc. While this does not include dividends paid, which amount to about 15pc of our purchase price, it nevertheless represents a disappointing performance in a period when the housing market has experienced a significant boom. Even in London, where the market has recently lagged much of the wider UK, house prices have risen by 11pc in the past two years.

Whether this trend persists or not over the coming months is clearly a known unknown. Berkeley, though, is well-positioned to survive even the worst housing market bust and to capitalise on a subsequent boom. Investors who can ignore downbeat housing market predictions and stomach heightened short-term share price volatility are very likely to enjoy high returns in the coming years.

Questor says: buy

Ticker: BKG

Share price at close: £37.43

Read the latest Questor column on telegraph.co.uk every Sunday, Tuesday, Wednesday, Thursday and Friday from 5am.

Read Questor's rules of investment before you follow our tips.

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