Investors in Berkeley Group (LSE: BKG) have endured a challenging first half of 2014. That’s because shares in the London-focused housebuilder have fallen by over 17% year-to-date, while the FTSE 100 has made gains of around 1% over the same time period.
However, with Berkeley Group’s recent update beating market expectations, could now be the right time to buy shares in the company?
A Booming Market
There is no doubt that the London property market is experiencing a boom. Demand for housing remains extremely high and, thus far, has shown little sign of abating. This has allowed Berkeley Group, for example, to increase its average selling price over the last year by 20%, as the company seeks to benefit from the extremely strong market through building as many properties as it realistically can. The knock-on effect on revenue and profitability has been very positive and, as mentioned, Berkeley Group has beaten market expectations over the last year.
So Why Are Shares Down This Year?
Clearly, things are going very well for Berkeley Group. However, investors are concerned about the potential effects of an interest rate rise on the demand for London property. Indeed, an increase in interest rates could impact upon demand in two main ways. Firstly, it could reduce demand from UK buyers whose cost of financing a purchase increases as a result of higher interest rates. Secondly, higher interest rates generally mean an appreciation in currency, meaning UK property becomes less attractive to foreign buyers. As a result of a general expectation that interest rates will be increased over the short to medium term, Berkeley Group shares have been hit hard.
Looking Ahead
However, it could be argued that the market is jumping the gun with regard to the fall in Berkeley Group’s share price. For starters, a falling inflation rate means interest rate rises are becoming less likely, since the Bank of England is far more fearful of deflation that an overheating housing market. Furthermore, interest rates are unlikely to move upwards at a particularly brisk rate so as to avoid suffocating the economic recovery.
So, while higher interest rates would not be great news for Berkeley Group, the sun could yet shine for a good while longer and allow the company to continue making hay at a quite astonishing rate.
