Berkeley Group shares rise in shadow of stamp duty switch

Berkeley Group led the UK house builders sector on Friday as its shares marked their best one-day rise in a year after forecast-beating results.

Berkeley’s stock hit an 8-month high following first-half earnings showing pre-tax profit surged 80% to £304.9m.

The FTSE 250-listed group that markets itself as builder of “beautiful” residences, with a focus on London and the South East of the UK, also said it was on track to meet full-year expectations, with profits rising on the back of strong demand in the capital.

Berkeley is expected to post a full-year pre-tax profit rise of about 20% to £455m in its current financial year, judging by the average forecast from a group of analysts polled by Thomson Reuters.

It also announced an interim dividend of 90p per share, the same level as the last two interim dividends.

Roller coaster year ends with 30% rise in 3 months

After something of a roller-coaster ride this year, with a sharp dip into early October, Berkeley Group shares have advanced almost 30% in a little under three months.

Shares of Berkeley’s peers like Bovis Homes Group and Bellway Plc. also extended recent gains on Friday.

Berkeley’s shares have strongly tracked Thomson Reuter’s UK Real Estate Index (white line) for most of the year, ebbing and flowing in sync with sentiment as investors sought to square roaring trade in London’s housing market, with strong signals from the Bank of England that a virtually zero-interest-rate-environment was drawing to an end.

However large banking groups like Royal Bank of Scotland and HSBC and other influential UK firms have recently begun to forecast that base rates could remain close to historic lows at least for a year longer, pushing expectations for the first BoE rate hike since 2007 into 2016.

This has helped put a floor under share prices in the sector.

Berkeley sees housing market going back to normal

An additional spur for Berkeley shares, and those of its peers of late may relate to the firm saying the housing market was returning to a more ‘normal’ basis after record growth last year with double-digit house price rises fuelled by a government mortgage guarantee scheme.

A further unexpected tailwind for many residential builders and developers came this week, with UK Chancellor Of The Exchequer George Osborne’s Autumn Statement, in which he announced extensive reforms of stamp duty on house purchases.

The effect will significantly reduce taxation on about 98% of all individual residential property buys, whilst raising duty on homes worth £925,000 to 5%, to 10% for those worth £1.5m and to 12% on houses valued higher.

Stamp duty changes may hit home builders like Berkeley

The home buying tax revamp would appear on the surface to put ‘upper-bracket’ developers like Berkeley Group in the frame for a potential headwind, since the average price of the homes it builds appears to be no lower than £1.25m.

Wealthier-than-average purchasers of such homes could face the upper-end of the new taxation between 10%-12%, potentially damping the segment of the home building market occupied by Berkeley and others.

Further potential impediments might also include the recent cooling off of economies in China and Russia as rapid growth fuelled by credit is reined in by the government of the former and the latter takes a double hit from the collapse of oil prices and sanctions.

Both have been regions that supplied keen buyers of more-expensive-than-average London homes in recent years.

The opposition Labour Party’s so-called ‘mansion tax’ proposals are a further potential risk for firms like Berkeley, in the event Labour wins next year’s general election.

Rated a tad higher than sector

Looking at relative strength versus the broad sector we see Berkeley is not a favourite on EPS growth forecasts year-on-year, trailing at an expected 13% against the 26% sector average.

At the same time Berkeley stock trades at the equivalent of 10 times forecast earnings for the next twelve months, according to Thomson Reuters data, a smidgeon above its peer group average at 9.7.

This mismatch between earnings sentiment and share price seems likely to be re-balanced over the next twelve months.

With the stock this summer having fallen out of a channel that in fact goes back to early 2011, further upside progress of the like seen today faces some nearby overhead challenges.

Traders of City Index’s Daily Funded Trade in Berkeley Group have been similarly ambivalent on the title in the last few days, judging by a chart of daily intervals including the most recent resistance points before sentiment pushed the trade below its rising channel.