It’s a case of damage limitation for London’s housebuilders, rather than keeping the storm out altogether. Another overshoot in the monthly inflation reading puts mortgage borrowers in line for more pain, to be shared by the throw-them-up and sell-them-fast homebuilders.
For Berkeley, a recognition that ratesetters will need to be more aggressive than anticipated has caused sales rates to fall by 20 per cent in recent weeks, worse than the 15 per cent annual decline over the 12 months to the end of April.
But the roof is by no means falling in for the FTSE 100 group. Even projecting the 20 per cent decline in sales volumes to the rest of the financial year, pre-tax profit guidance for this year and the next has been held at £1.05 billion, even if that had already been downgraded in the wake of the mini-budget at the end of last year.
Why no fresh cut? A sturdy forward order book that totalled £2.14 billion at the end of April, down only slightly on the £2.17 billion at the same point last year and still higher than the £1.8 billion pipeline just before the pandemic whacked the housing market out of kilter. That figure represents the 15 per cent cash deposits put down on homes set to be delivered over the next three years. In practice, it means Berkeley has covered 85 per cent of expected sales for the present financial year and 45 per cent for next year. Cancellation rates, which had hit about 20 per cent in the aftermath of the Kwasi Kwarteng-induced rocketing in gilts, have returned to a more normal 15 per cent.
Berkeley isn’t home and dry. The cushion provided by the sales pipeline will start to thin over the next 12 months, which, depending on the magnitude of the recovery in housing market activity, leaves the group having to work harder to sustain sales growth at historic rates. There’s also the possibility of a more marked downturn in sales rates as this year progresses, which would put the two-year profit guidance in doubt.
The same goes for house prices. Transaction data across the broader market has been cooling since last summer, but the decline in the annual rate of price growth has accelerated since the Trussanomics debacle. Berkeley’s average sales price nudged up to £608,000 last year, from £603,000, although that reflected the mix of properties sold. Sales prices on properties of similar size and location have held firm in price since the end of April, according to Rob Perrins, Berkeley’s boss.
If potential buyers “lack urgency, as Perrin puts it, that approach justifiably has been adopted towards acquiring land. Berkeley can afford to hang fire on buying more land and conserve cash in the face of weaker demand. Its vast land bank equates to just over 58,000 plots, almost 43,000 of which have planning consent, which covers expected completions to 2027. That also insulates it from some of the worst impacts of a snarled-up planning system.
The scale and nature of that land bank, often acquired without planning consent, is one reason for Berkeley’s superior margins, which together are justification for the group’s premium compared with its peers. A price of 1.3 times forecast book value is above a ratio of 1.1 for Persimmon, the next most expensive housebuilder.
Pulling back from the land market also will boost its coffers, which stood at a net £410 million at the end of April. Analysts at Investec have forecast net cash of almost £500 million at the end of April next year, enough to cover the £285 million to be handed back to shareholders via dividends and share buybacks this year. But without clarity on where and when the peak might arrive for rates, the shares will struggle to find greater favour.
ADVICE Hold
WHY The shares offer good income but will likely flatten while uncertainty over interest rates remains
Liontrust Asset Management
Public valuations are often rooted in logic. Take Liontrust Asset Management, which sustained £4.8 billion in net outflows over the 12 months to March, about £2 billion of which came in the final fiscal quarter and a severe about-turn for a group that gained £2.5 billion in net new money a year earlier. Its shares are now changing hands for only eight times forward earnings — close to their lowest rating over the past decade.
The same thinking can be applied to the London-listed manager’s takeover tilt towards GAM, the troubled Swiss funds group. Shareholders in GAM would own a mere 12.6 per cent of the combined group, despite contributing a little over 40 per cent of the assets under management.
The heavily lossmaking GAM has been beset by scandal in recent years, not least the emergence in 2018 of an issue related to its holdings of illiquid debt. Its former star fund manager had also invested more than £1.5 billion of client money in assets from companies related to Greensill Capital, the supply chain finance company that went on to fail. It has recorded five years of net outflows. What’s the rationale behind the deal? Gaining diversity geographically and by asset class. Liontrust funds are distributed with a bias towards the UK, versus GAM’s European tilt. The latter is more focused on fixed-income and alternatives, differing with Liontrust’s equity core.
There are also efficiencies on offer, Liontrust reckons, by removing duplicate administration and technology expenses. Restructuring costs of £45 million are expected to achieve savings of £57 million. But analysts at Numis think the cost burden will be far higher, at £86 million.
Shareholders are due to vote next month, but the deal remains more appealing for the beleaguered GAM than Liontrust, even if the bidder is not without its own troubles. The shift from growth to value stocks has caused market losses to mount to £2.4 billion last year.
Seeking strength in scale makes perfect sense for active asset managers under siege from cheaper, passive strategies. But the choice of target is more questionable.
ADVICE Avoid
WHY GAM deal looks unappealing for shareholders
