London-focused home-builder Berkeley Group Holdings (LSE: BKG) isn’t exactly flavour of the month right now. It has suffered thanks to a steady slew of data showing the housing market in the capital suffering more that the rest of the country.
Claims that the London market is overheated are nothing new. But it has provided the tinder for home price growth to reverse thanks to the extra uncertainty caused by the result of the 2016 Brexit referendum, and fears over the subsequent slump in buyer appetite in the near term and beyond.
Latest data from the Office for National Statistics again underlined the stress on this territory just last week, the body announcing that the average home value dropped 0.7% in July to £484,926, the fastest contraction for around nine years.
And things could get even worse. Indeed, a recent report by Reuters showed that one-third of industry experts polled over the state of the country’s housing market put the chances of a “significant” drop in London home prices at around one-in-three should Britain tumble out of the UK without a deal.
Priced in?
The chances of the government embarking on a disastrous ‘no deal’ Brexit have increased rapidly over the past few months, a scanario that I have discussed regularly in recent times.
However, some would argue that the potential for a painful and prolonged dip in London housing prices is reflected in Berkeley’s low, low forward P/E ratio of 9.6 times, a reading that sits inside the accepted bargain territory of 10 times and below. And I would agree.
In fact, I reckon this low reading offers plenty of upside should the UK avoid a catastrophic exit from the European bloc.
On top of this, there is some evidence that the London market is actually beginning to stabilise despite that worrying dataset from the ONS. Firstly, that Reuters poll I mentioned above showed that experts have suggested a 1.6% drop in London house prices in 2018, but that this will slow to just 0.1% in 2019.
And recent trading details from Berkeley itself in September suggested that the market is starting to recover. It said that while the market in the capital lacks “urgency,” it added that pricing during the four months to August had remained “robust” and that market conditions had been “consistent” since around the middle of June.
Hot yields
More specifically Berkeley commented that prices have held up more recently thanks to the “demand for good quality, well located homes that enhance communities and meet the local housing need.” Make no mistake: like the rest of the country there remains a shortage of decent homes in the capital, and this means that the long-term outlook for the house-builder remains strong regardless of any immediate hiccups caused by Brexit.
The City may be expecting Berkeley to report double-digit-percentage earnings losses for the next two fiscal years. But a bright profits picture over a longer time horizon leads the City to predict further generous dividends through this period.
A 200.5p per share payout is predicted for the year to April 2019, and a 202.1p reward for fiscal 2020. This means that yields stand at a handsome 5.4% and 5.5% respectively, figures which, like the Berkeley cheap earnings multiple, make it a very-attractive share to buy today.
