Berkeley shares surge to new record despite 8216 Brexit 8217 warning

Berkeley Group Holdings, the metro-centric housebuilder with a focus on higher-value properties, has joined a number of major UK firms to warn about the impact of a ‘Brexit’ referendum, even as it posted better-than-expected full-year profits.

Shares of the FTSE 250-listed group that markets itself as a builder of “beautiful” residences”, topped the mid-cap index for most of the session, with a rise that almost touched 9%, taking Berkeley to a fresh all-time peak of 3440p.

The firm is the latest UK housebuilder to become a lodestone for a sector that has been a recipient of a virtuous circle of low-interest rates, strong demand for residential property, and government aid towards first-time buyers and beyond.

Berkeley’s additional advantage is an exposure to house prices in London, which have been rising markedly faster than the UK average for years.

The Office for National Statistics’ monthly average house price data showed UK prices excluding London and the South East increased 5% in the 12 months to April.

Prices in London came in below the national average in April, with a 4.3% rise.

But it’s the first time that has happened since July 2009, when London prices fell 9.4% year-on-year compared to the UK average in that month of -8.4%.

Key figures

• FY pre-tax profit of £539.7m vs. forecast of £470.1m
• Sees volume up roughly 20% in year to April 2017
• Sold 3,355 homes in the past financial year, down from 3,742 the year before
• Figure included the one-off disposal of 534 properties from a rental fund
• Volumes expected to remain roughly the same in new financial year

‘Political Uncertainty’?

Investors are therefore taking BKGH management’s ‘Brexit’ caution with a pinch of salt.

‘Political uncertainty’ ahead of a referendum on Britain’s membership of the EU, due by the end of 2017, appeared to be at the heart of the group’s concerns, though it has not provided a great deal of detail regarding how it fears this uncertainty could impact its business.

Neither did Berkeley imply or state directly, as some major companies operating in the UK have, that it might officially decamp to an alternative capital city, in the event of a UK referendum vote going in favour of the euro sceptics.

“For London to be a world city, it has to have influence, it has to remain in Europe”, said Berkeley Managing Director Rob Perrins during a media interview on Wednesday.

“Europe adds value in terms of allowing us into the single market”, he added.

‘Upper-bracket’ developers like Berkeley Group, whose average residential property price appears to be no lower than £1.25m, will tend to rely on overseas buyers more than housebuilders with a broader property market focus.

Further potential impediments to capitalising on that costlier end of the market might include the recent cooling off of economies in China and Russia, since both regions have supplied keen buyers of more-expensive-than-average London homes in recent years.

However, there are no signs that these bumps in the road are likely to upset Berkeley’s advance yet.

The main question facing Berkeley Group is the same one it faced about 18 months ago, when its market price reached its prior peak in February.

Then as now, BKGH sat at or close to the top of a group of its rivals in terms of investors’ implied valuation of its ‘gross liquidity’.

The ratio of Berkeley Group Holdings’ market value to a five-year average of the operating cash flow (OCF) on its books during the last five years surpasses all other big UK residential property developers.

On this basis, should sentiment toward the sector change, the implication is that Berkeley’s shares would have the furthest to fall in order to revert back to the sector valuation.

Data from Thomson Reuters 

Still, BKGH’s recent share price consolidations have been more moderate than the rate implied by momentum (see ellipses marking falling waves in Slow Stochastic sub-chart).

A gap of more than 6% between Tuesday’s close and Wednesday’s open does look dicey for holders, but beneath it, probable support areas quickly begin to stack up.

Not to mention that Moving Average Convergence/Divergence (MACD) implies the dispersal of current upward momentum is not yet complete.