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

Market News

US Treasuries rallied – the 10-year currently yields 4.22% – after the release of retail sales data that was below expectations. Excluding volatile vehicle sales, retail sales fell by 0.1% versus a market forecast for an increase of 0.2%. Clearly, the hope is that this will spur the Federal Reserve into an earlier than expected interest rate cut, although officials emphasised the need for more evidence of cooling inflation doing so. The dollar slipped and gold ticked up to $2,333 an ounce. Goldman analysts recommend gold as an inflation hedge for US elections. The bank’s base case is for prices to rise to $2,700 an ounce by year-end.

US equity markets moved higher last night – S&P 500 (+0.3%), Nasdaq (+0.03%). Nvidia became the world’s most valuable company for the first time, overtaking Microsoft and Apple. The AI play rose by 3.5%, boosting its market value to $3.3 trillion. This US is closed today for a holiday. This morning in Asia, markets were also firm: Nikkei 225 (+0.2%); Hang Seng (+2.9%); Shanghai Composite (-0.4%). The FTSE 100 is currently trading 0.2% lower at 8,175.

UK CPI inflation for May came in at 2.0%, with the core measure at 3.5%, both in line with consensus. All but one member of the Times’ Shadow BoE MPC advocated for rates being kept at 5.25% on Thursday; former BoE MPC member Goodhart (now part of the shadow MPC) said “The bar for changing interest rates in the middle of an election campaign is rather high. Present conditions suggest that we are nowhere near meeting that bar”. One member called for a 25bp cut. Sterling trades at $1.2725 and €1.1852.

The oil price held on to its recent gain – Brent is $85 a barrel – underpinned by early dollar weakness and lingering geopolitical risks.

Source: Bloomberg

Company News

Berkeley Group has today released results for the financial year ended 30 April 2024 and raised its profit guidance for FY2025. The company has also announced the establishment of its own ‘Build to Rent’ platform. In response, the shares are little changed in early trading this morning and currently trade at 1.5x NTA (NAV) of £33.63, 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.

During the year, macro volatility remained elevated, domestically and abroad, with the prospect of UK interest rates remaining higher for longer and weak economic growth projections. Against this backdrop, sales rates were around a third lower than last year.

Profit before tax fell by 7.7% to £557m, in line with its guidance. The operating margin fell by 80 basis points to 19.5% and net operating costs reduced by £14m to £165m. The group delivered 3,521 new private and affordable homes, of which 87% are on regenerated brownfield land. The average selling price rose from £608k to £664k, reflecting the mix of properties sold in the period.

The pipeline comprises 13,500 plots across 13 sites, while cash due on forward sales is £1.7bn. Sales pricing is firm and above business plan levels, with build cost inflation across most trades at negligible levels.

The balance sheet remains strong, with net cash of £532m as at 30 April 2024, and total liquidity of £1.7bn. The group has unrivalled land holdings with £9.6bn of future gross margin – two sites were added in the year, including one transfer from the pipeline.

Recognising the strong occupational and institutional investment demand for high quality, well-managed rental homes in London and the South East, Berkeley is establishing its own Build to Rent (BTR) platform to maximise returns in today’s market conditions. The company has identified some 4,000 homes across 17 of its sustainable and well-connected brownfield regeneration sites as an initial portfolio for this platform.

Shareholder returns during the 12 months to 30 April were £170.4m, made up of dividends (£98.1m or 92p paid in September 2023 and March 2024) and share buybacks (£72.3m). The group is on target to deliver an annual return of £283m for the year to 30 September 2024 currently equates to £2.67 per share.

Berkeley continues to benefit from a strong order book and has already secured 80% of its sales for next year, underpinning a 5% increase in guidance for FY2025 pre-tax profit to £525m. Guidance for FY2026 has been re-affirmed at £450m.

The group continues to see good levels of enquiry for well-located homes built to a high standard of design and quality but recognises the current lack of urgency in the market is likely to remain until the long-anticipated reduction in interest rates commences. Management is, however, heartened by the strong political consensus behind increasing the delivery of new homes across the country and the recognition that regenerating brownfield land is the most sustainable and popular way to deliver this vital goal.

Source: Bloomberg