Shares of Berkeley Group (LON: BKG) plummeted over 17% Wednesday morning following the release of a strategic update ahead of its full-year results for the year ending April 30, 2026.
The update outlined a revised approach to the Berkeley 2035 plan, citing a challenging operating environment marked by increased costs, regulation, and geopolitical volatility.
The company reaffirmed its expectation of delivering pre-tax profit for FY26 of £450 million, with around £300 million of net cash. However, the market reacted negatively to the announcement that Berkeley will freeze new land purchases, prioritizing value creation from its existing land holdings.
Berkeley cited an inability to achieve required rates of return on new land acquisitions due to increasing tax and regulatory burdens on residential development. The company possesses a substantial land bank of over 50,000 homes, with a further pipeline of more than 10,000 homes, primarily in London and the South-East.
The group intends to focus on optimizing its existing land holdings and bringing pipeline sites through the planning process, aiming to add £2 billion of value. Construction phasing will be matched to market demand and the pace of Building Safety Regulator approvals.
Investment in Berkeley Living, the company’s build-to-rent (BTR) arm, remains a priority. The first six buildings are well advanced, representing an investment of around £400 million, with the first BTR building already seeing lettings ahead of expectations. The group remains committed to delivering 4,000 BTR homes by the end of FY35 but will review the phasing of future schemes.
Berkeley is targeting an operating margin within its historic range of 17.5% to 19.5% through maintaining development margins and further reducing operating costs. Shareholder returns remain a focus, with £336 million delivered of the £2.0 billion commitment under Berkeley 2035. The next target is a further £564 million by September 30, 2030. Given the share price trading below the forecast net asset value per share (NAVPS) of approximately £39 at year-end, the company believes share buybacks are the best way to maximize shareholder value.
Due to the ongoing conflict and deterioration of the economic outlook, Berkeley is reducing work-in-progress investment to align with current sales levels. The company forecasts delivering above £1.4 billion of pre-tax profit over the next four years (FY27 to FY30), with a profit profile slightly weighted towards 2027.
The company is targeting a return on capital employed in the core business of at least 15% as soon as possible, and between 11% and 15% in the intervening years.
Analyst Summary: Bull and Bear Cases
Bull Case:
- A focus on shareholder returns and optimizing existing land holdings may provide support to the stock.
- The long-term outlook for London remains positive, with the city retaining its status as a global financial center.
Bear Case:
- The market has reacted to concerns that the challenging operating environment will impact Berkeley’s growth prospects.
- A freeze on new land purchases, while a prudent measure, could limit future expansion opportunities.
- The near-term outlook for the company and the sector remains uncertain.
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