The Investment Column: Berkeley builds on its reputation

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The Independent Online
Tony Pidgley earned a reputation in the late 1980s for being something of a housing market guru. The managing director of upmarket housebuilder Berkeley went substantially liquid just as house prices were riding for a fall. During the subsequent five-year property slump Berkeley bucked the sector trend, delivering a period of profits, earnings and dividend growth backed by a cash-rich balance sheet.

Results for the year to April continued this enviable run. Pre-tax profits rose 15 per cent to pounds 43.4m on turnover 18 per cent higher at pounds 334m. Earnings per share advanced a more modest 11 per cent to 34.8p, held back slightly by the dilution of February's pounds 73m rights issue.

The secret of Berkeley's success lies, as with any good property business, in "location, location and location" and the company is benefiting from a trend towards the small town and city centre sites it specialises in.

The bulk of its business is building executive-style homes, often with joint venture partners such as large land-owning utilities such as Thames Water, in and around London, a region which has seen the biggest house price rises in recent months. Projects in the capital include schemes in Barnes, Hampstead and near St Paul's Cathedral.

As the chart below shows, 80 per cent of the 1,560 homes sold last year went for at least pounds 100,000. The average selling price rose from pounds 190,000 to pounds 208,000, reflecting a shift towards more expensive homes rather than any significant upward movement in house prices, which are growing at about 4 per cent a year.

So much for the good news. Given Berkeley's impressive track record, when Mr Pidgley warns that activity in the housing market could stagnate in the run-up to the general election, commercial rivals and potential house buyers alike should take notice.

Assuming the Conservatives leave going to the country until the last possible moment next May, Berkeley reckons it could lose up to two months of sales worth pounds 60m due to uncertainty about the election outcome and its consequences for interest rates and consumer confidence.

But Berkeley is cautious, and net reservations in the first two months were up a fifth on the same period last year. Whether Berkeley can maintain its momentum as political uncertainties increase remains to be seen, but with pounds 35.6m of cash in the bank, it is better placed than most.

Merrill Lynch looks for pre-tax profits this year of pounds 56m rising to pounds 66.5m in 1997/98. That implies a p/e ratio falling from 16 to 13 with the high- flying shares closing 3p better yesterday at 617p. The executive homes market may not look so clever a year from now, so that is probably high enough.