Berkeley Group Displays Resilience in Face of Testing Housing Market Conditions; Shares Undervalued

We make no change to our 2023 financial estimates for Berkeley Group Holdings BKG with the no-moat homebuilder confirming that its performance remains resilient in early 2023 despite the marked uncertainty that currently surrounds the U.K. housing market. While sales have slowed since mortgage interest rates surged in September 2022, we expect Berkeley’s forward order book—which stands at an approximate GBP 2 billion—to assist Berkeley in traversing current ominous U.K. housing market conditions. Berkeley reaffirmed its confidence in delivering about GBP 600 million in pretax earnings in fiscal 2023 and GBP 1.05 billion over the fiscal 2024-25 period—broadly aligning with our forecasts. While our long-term expectations for Berkeley remain unchanged, a time-value-of-money adjustment leads us to lift our fair value estimate by 2% to GBX 4,800.

We think Berkeley remains more favourably positioned than its U.K. homebuilder peers to ride out challenging near-term housing market conditions, given its robust forward sale position. However, with Berkeley shares trading at a 16% discount to our fair value estimate—representing the slimmest discount to fair value among our U.K. homebuilder coverage—its relative strength is a view that is shared broadly among equity market investors. Consequently, we see better value elsewhere among our U.K. homebuilder coverage. No-moat Bellway remains our top U.K. homebuilder stock pick; see our Feb. 9 note “Forward Orders Slow for Bellway Amid Ongoing Housing Market Uncertainty; Shares Appeal” for greater detail.

Frayed nerves in the U.K. housing market are presenting a challenge, with Berkeley’s sales rate since September 2022 having slowed by a meaningful 25% relative to the first five months of fiscal 2023.