While the property market across the country has leapt ahead over the past year, London has stood still. Prices in the capital were 0.2 per cent higher in May compared with March 2020, according to the latest Rightmove figures, compared with a 13 per cent increase in Wales and 11 per cent in the North West and Yorkshire and the Humber.
A sense of perspective is essential, however. Average prices are still three times higher in London than in the rest of Britain, and 25 years ago the average house in the city cost a now almost unbelievable £79,000. The Mayor of London’s office estimates that 66,000 new homes will need to be built each year for at least 20 years to meet demand.
Berkeley, the FTSE 100-listed housebuilder, makes about 75 per cent of its revenue in London, analysts at Jefferies estimate, and its shares have lagged behind rivals this year while the London market has lacked sparkle. The shares are down 2.3 per cent since the start of the year, while fellow FTSE 100 housebuilders Persimmon and Barratt have added 8.1 per cent and 4.4 per cent respectively. Berkeley’s shares fell 21p to £46.19 yesterday.
Berkeley said in March that the value of sales reservations in London was 20 per cent lower than the previous year. However, it said yesterday that it had seen “vibrancy returning” to the city in recent weeks as Covid-19 restrictions have eased. Sales inquiries in London are back above pre-pandemic levels and sales reservations are on track to meet targets for the next two years.
Berkeley restated its faith in London’s recovery, saying the damage to urban economies during the past fifteen months “does not represent a permanent structural shift that has the capacity to reverse urbanisation or detract from the attraction of a global city such as London”.
In the year to the end of April Berkeley’s revenue rose 15 per cent to £2.2 billion as the company’s average selling price climbed from £677,000 last year to £770,000, and pre-tax profit rose 2.9 per cent to £518.1 million. It said that pre-tax profit would be “similar” for the next two financial years.
The company, which specialises in regenerating brownfield land, added ten new sites during the year, seven in London and three in the Home Counties, where more than 6,650 homes will be built. Berkeley also got planning consent for four large projects in London and started work at six sites, where 9,900 homes are being built.
Berkeley shareholders have come to expect regular cash returns and the company said yesterday that it would restart a return of surplus capital that it suspended in March last year. It will return £450 million to shareholders, the equivalent of £3.70 a share, through issuing “B” shares followed by a consolidation, if investors vote in favour at the annual meeting in September.
The total would be made up of £222 million to complete the £281 million of shareholder returns that the company had promised this year plus £228 million of surplus capital, the first half of the £455 million in cash that it said it would return to shareholders before the pandemic hit. The company said it would keep the remaining £227 million of that to invest in new land over the next two years.
Berkeley’s shares have climbed 9 per cent since Tempus recommended buying them in December, and with London still chronically short of housing, the company looks well placed for further growth. “The deficit in London housing should provide some protection, while the group’s step-up in housing volumes in the next three to five years should see it post decent growth over the longer term,” analysts at Peel Hunt said.
Advice Buy
Why London has a long-term need for more housing
Capita
Capita has been trying to turn itself around since 2018 but investors have yet to be convinced — the shares were trading at around 250p at the start of that year and have drifted downwards ever since, closing at 40p yesterday.
However, there are encouraging signs at the outsourcing company. The shares jumped 9 per cent on Monday after Capita said it was on track to increase its revenues for the first time in six years and announced the sale of Axelos, an employee certification company that it co-owns with the Cabinet Office, for £380 million.
In March, Jon Lewis, chief executive, said that he was streamlining the company into two divisions, one serving private companies and the other working for government customers.
In the private sector, Capita operates call centres and IT support for companies including Tesco Mobile, while in the public sector, its work includes collecting the London congestion charge and running HR and payroll systems for academy school trusts.
Another bright spot in Monday’s announcement was the winning of a £925 million training contract from the Royal Navy.
Capita had net debt of £1.08 billion at the end of 2020 and has £440 million of debt coming due in the next two years.
The company is seeking to strengthen its finances in part through disposals, including Axelos, and Education Software Solutions, which it sold to Montagu Private Equity for £343.5 million in February.
Capita will make £184 million in cash proceeds from its stake in Axelos, and has also lined up its secure software and specialist insurance businesses for sale.
Capita’s shares have climbed 15 per cent since Tempus recommended buying them in August 2020. Now we recommend holding them until it becomes clearer that the latest changes will stick.
As analysts at Shore Capital noted, “the fruits of the severe ‘pruning’ of the business over the past three years” will not fully feed through until 2022, when the company says it will be able to deliver positive sustainable free cashflow.
Advice Hold
Why Making progress, but turnaround is incomplete
