Analysts upbeat on Berkeley shares despite cautious housing market

With UK house prices forecast to fall in the final quarter of the year and construction costs continuing to rise, housebuilding stocks like Berkeley have struggled in 2022. However, the company remains confident it can meet its profit targets, and analysts are also optimistic it may be able to outperform some of its competitors.

After a golden period during the coronavirus pandemic, the UK’s housing market finally looks set to cool down. That was the message last week from London housebuilder Berkeley [BKG.L], when it announced that, going forwards, new land would only be added to its land holdings “very selectively” amid forecasts of a property slump and ongoing inflation of 5–10%.

CEO Rob Perrins said in the company’s 6 September update that pressures including tariffs on housebuilders to deliver affordable housing were among the factors making private housing starts challenging. He said numbers of these had halved since 2015 and predicted they “will halve again”. However, the company offered an optimistic outlook for its fiscal 2023 profits and maintained that there was still strong demand from home buyers.

Analysts appear to agree with its growth prospects. The consensus is that most remain generally positive on the stock’s outlook, with Berenberg Bank upgrading Berkeley shares on 12 September on the basis that it believes the company can achieve its profit guidance. The Berkeley share price has fallen 27.2% year-to-date to 3,475p on 14 September.

Strong guidance for Berkeley

Countering the gloomy outlook for the housing market, Berkeley looks on track to reach its full-year guidance. The FTSE 100-listed company said it anticipated pre-tax profit of £600m for the financial year to 30 April 2023, slightly above the consensus forecast of £592m compiled by S&P Market Intelligence. Berkeley anticipates the figure will rise to £625m for 2024. 

Following its earnings update on 2 September, Berkeley stock rose by 3.5%. The company added profits for the current year will be 55% weighted to the second half. It forecast forward sales at the end of the year would be slightly higher than the £2.17bn at the end of April 2022, thanks to “ongoing resilience” in sales.

Nearly all major UK housebuilders’ share prices have slumped this year, with many slipping significantly more than Berkeley. Barratt Developments [BDEV], Persimmon [PSN.L] and Bellway [BWY.L] were down 44.5%, 44.7% and 40.8%, respectively, in the year to 14 September.

However, despite inescapable macroeconomic woes and rising interest rates, housebuilders are still reporting robust demand, suggesting the public’s appetite for property investment may continue at least in the short term.

Berkeley better positioned than rivals

At the beginning of September, HSBC warned of a forthcoming housing slump as mortgage rates rise and inflation continues to surge. The bank’s building materials team forecast a 20% reduction in UK housing demand through the autumn and winter. However, while HSBC analysts downgraded a number of housebuilders from ‘buy’ to ‘hold’, it maintained a ‘buy’ rating on Berkeley shares.

Analysts at Berenberg also recently reviewed its ratings on several UK housebuilding stocks, downgrading six companies in total, including Taylor Wimpey [TW.L], Vistry [VTY.L] and Redrow [RDW.L]. However, the bank upgraded its outlook on Berkeley from ‘hold’ to ‘buy’ and raised its price target to 4,500p, thanks to a “good level of demand [that] continues to support pricing above business plan levels”. The Berenberg analysts also noted that Berkeley is likely to meet its medium-term profit forecast.

Berkeley’s focus on more upmarket projects stands it in good stead for survival, according to Sophie Lund-Yates, an equity analyst at Hargreaves Lansdown. She wrote in a recent research note that Berkeley “offers something different to the other large builders”, adding that “many of its sites are technically challenging, and that’s afforded it enviable margins in the past”. 

She said domestic and international demand in London was still strong, with the housing supply shortage an ongoing situation. “The average selling price has fallen, largely due to the type of homes sold, but remain above [Berkeley’s] business plan level and crucially high enough to offset increased building costs,” she wrote.

At MarketBeat, eight analysts offering a consensus on the stock rate it a ‘moderate buy’. A 12-month median price forecast of 4,831.25p would represent a 39% upside from its 14 September closing price of 3,475p.