This housebuilding stock can overcome property market difficulties to post further gains

Berkeley remains a worthwhile purchase owing to its solid financial position and attractive long-term prospects

Interest rates are the heartbeat of the housing market. Their five percentage point rise over the past two years means that houses are now less affordable than at any time since the global financial crisis prompted dramatic interest rate cuts. As a result, the financial performance of housebuilders has suffered over recent months.

While this situation is unlikely to reverse as quickly as it emerged, modest interest rate cuts are nevertheless on the horizon. Annual inflation has fallen rapidly of late and is expected to decline to the Bank of England’s 2pc target within two years, while a shrinking economy is set to pile additional pressure on policymakers to lower interest rates.

Such a move would be most welcome among investors in Berkeley Group. The London-focused housebuilder’s recently released half-year results showed it is currently facing a tough operating environment. It delivered 15pc fewer homes than in the same period of the prior year, while earnings per share declined by 1pc.

As ever, the company’s balance sheet is sufficiently sound to enable it to emerge intact from the current housing market slowdown. Its net cash position stands at £422m, with it expecting this figure to remain above £400m over the next two financial years. It also anticipates that it will generate at least £1.5bn in cumulative pre-tax profits in the three years to 2026.

While this equates to a decline on the £604m pre-tax profits figure achieved last year, it nevertheless highlights the company’s confidence in maintaining a solid financial performance in spite of a tough economic outlook. And while its pipeline declined by 500 plots so that it stood at 13,500 plots by the end of the first half of the year, it still has £7.2bn of future gross margin in its land holdings.

Investors, of course, are already looking ahead to a more prosperous period for the firm amid the prospect of interest rate cuts and an improving economic outlook. Berkeley’s share price has risen by 19pc in the past six months, which means it now trades on a forward price-to-earnings ratio of around 13.

In Questor’s view, this represents good value for money given the prospect of a stronger operating environment. A price-to-book ratio of less than 1.5 further evidences its capacity to deliver share price growth.

Clearly, though, there are risks other than a slow-paced shift in monetary policy and a weak rate of economic growth. Political risk remains elevated for the wider housebuilding sector, while regulatory and planning challenges specifically in London have weighed on the company’s recent performance. Fundamentally, though, there is a vast shortage of new homes being built. Given that there are a limited number of companies capable of overcoming the complex nature of brownfield regeneration projects at the required scale, Berkeley has a strong competitive position that is likely to equate to improved financial performance over the long run.

It is also set to benefit from the end of rampant inflation, which has put additional pressure on costs across the housebuilding sector over recent months. The company expects to maintain its operating profit margin within its long-term historical range of 17.5-19pc over the next three years, with net operating costs declining by 11pc in the first half of the current year.

A solid financial outlook means the company will persist with its longstanding shareholder return programme through to September 2025. On an annual basis, it is set to total 267p per share and can include share buybacks alongside a minimum dividend of 66p per share.

Given the stock’s attractive valuation, a share buyback programme seems entirely sensible.

Since Questor first advised readers to purchase Berkeley in August 2019, its share price has risen by around 20pc. Due to it being a fundamentally sound business that is well placed to capitalise on an ongoing imbalance between supply and demand within the residential property sector, we have consistently maintained our bullish stance on the stock.

Although recent interest rate rises and other risks currently present “bumps in the road” for the business, it has the capacity to overcome them and deliver further positive returns. Therefore, there is no reason to change our view that the company’s shares offer index-beating potential over the long run. Keep buying.

Questor says: buy

Ticker: BKG

Share price at close: £47.62

‘It now trades on a forward price-toearnings ratio of around 13. This represents good value for money’