Morning Note: Market news and an update from Berkeley Group.

Market News

US equity markets traded higher last night – S&P 500 (+0.8%); Nasdaq (+1.4%) – with the focus on today’s jobs report – non-farm payrolls of 185k is expected. Consensus sees the unemployment rate staying at 3.9%. Alphabet rose by 5% following the introduction of Gemini, its most advanced AI model. The market appears to be taking the view that Google’s Bard powered by Gemini will be a formidable competitor to Microsoft’s Bing and ChatGPT.

This morning in Asia, the yen stabilised after an earlier surge drove Japan’s stocks (Nikkei 225, -1.7%) and bonds lower. Elsewhere, the main indices were little changed: Hang Seng (-0.2%); Shanghai Composite (+0.1%). The FTSE 100 is currently 0.3% higher at 7,536, while Sterling trades at $1.2570 and €1.1647.

The 10-year Treasury currently yields 4.15%. About $61.7bn flowed into US money-market funds in the week to 6 December, taking total assets up to a record $5.9tn. German CPI inflation for November was in line with expectations at 3.2%. The 10-year Bund now yields 2.21%, well below the peak of almost 3% at the end of September.

Brent crude regained some of its recent losses and currently trades at $75.30 a barrel, while gold trades at $2,030 an ounce and is on track for its first weekly loss in four.

Source: Bloomberg

Company News

Berkeley Group has today released results for the six months ended 31 October 2023 and extended its profit guidance to cover FY2026. In response, the shares are down 1.5% in early trading this morning. The shares currently trade on 1.5x NTA (NAV) of £32.19, a deserved premium to the sector.

Berkeley is a residential housing developer focused on London and South-East England, the country’s most under-supplied housing market, with a broad spread of developments ranging from traditional family homes in the countryside to city apartments and mixed-use schemes. The company delivers over 10% of the capital’s new private and affordable homes. The group’s strategy has been developed for a cyclical market, with a focus on financial discipline and adding value through its development expertise, especially in large-scale, complex sites. Around half of purchasers of Berkeley’s properties are from overseas.

Berkeley responded to the softening sales market conditions through 2022, which accelerated from the end of September 2022, by focussing on delivering our forward sales, matching production on existing sites to demand, and limiting new investment in land. More recently, macro volatility has increased, domestically and abroad, with the prospect of UK interest rates remaining higher for longer and weak economic growth projections. Against this backdrop, the sales market lacks urgency and Berkeley’s net reservations for the six months to 31 October have been around a third lower than the average rate throughout FY2023.

Profit before tax rose by 4.6% to £298m, with an operating margin of 19.5% and net operating costs reduced by £10m to £79.7m.

Revenue of £1,192m was a touch lower than last year and arose primarily from the sale of new homes in London and the South-East. The group has delivered 1,785 new private and affordable homes, of which 87% are on brownfield land. The average selling price rose from £560k to £624k, reflecting the mix of properties sold in the period. The pipeline comprises approximately 13,500 plots across 13 sites. Cash due on forward sales is £1964m.

The balance sheet remains strong, with net cash at 31 October 2023 of £422m. The group has unrivalled land holdings with £7.2bn of future gross margin - two sites were added in the half-year, including one transfer from the pipeline.

Shareholder returns during the six months to 31 October were £127.6m, made up of dividends (£63.1m or 59.3p paid in September) and share buybacks (£64.5m). The annual return of £283m for the year to 30 September 2024 currently equates to £2.67 per share.

With today’s results, the group has extended its earnings guidance by a year to cover the three years ending 30 April 2026, over which period Berkeley is targeting to deliver at least £1.5bn of pre-tax profit, versus the previous guidance of £1.05bn in two years to 30 April 2025. 

The group also highlights that despite urban regeneration being a clear national priority, it has become increasingly difficult to progress this form of development as changes to planning, tax and regulatory regimes have created an increasingly uncertain, unpredictable and burdensome environment. 

The company has stated that if it does not recommence deployment of capital into new investment opportunities by 30 April 2027, it anticipates returning around 100% of the profit after tax earned over this period to shareholders, while maintaining financial strength and ensuring it can deliver its cross-cycle 15% pre-tax ROE target.

Source: Bloomberg