Is this FTSE 100 stock the best housebuilder to invest in?

One FTSE 100 housebuilding stock has outperformed all of its industry peers by a big margin this year. Should I buy its shares?

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In light of stalling house price growth, housebuilder stocks in the UK have had a torrid time this year. With drops of more than 35%, the industry has significantly underperformed the FTSE 100. Nevertheless, Berkeley (LSE: BKG) has managed to hold on and outperform its closest peer by 10%! This makes me wonder why that’s the case and whether its shares are worth me buying.

Standing tall

As mortgage rates continue to rise as a result of interest rate hikes, demand for homes has cooled. This can be seen in Rightmove‘s June house price index, which shows that house price growth is slowing. As such, analysts are actually expecting prices to drop, hence the overall weakness among the FTSE 100 housebuilder stocks.

Nonetheless, Berkeley stands out as doing better than its Footsie peers year-to-date (YTD). The shares’ performance becomes even more puzzling when I consider that it’s the only developer not paying a dividend. So, what’s behind the stock’s relative strength (bearing in mind that it’s still down this year)?

DeveloperYTD Performance
Barratt-39%
Persimmon-35%
Taylor Wimpey-33%
Berkeley-23%
YTD Performance as of 4 July 2022

Berkeley loves the south

Upon analysing the number of houses built, Berkeley’s more solid stock performance gets even more confusing. The Croydon-based developer doesn’t even rank within the top five builders in Britain for house completions.

DeveloperNumber of Houses Sold/Completions
Barratt17,579
Persimmon16,449
Taylor Wimpey14,933
Bellway10,307
Redrow5,718
Berkeley3,678
Source: ShowHouse 2021 Figures

However, there’s a metric in which Berkeley excels in — average selling price. Due to the housebuilder’s speciality in building posher, London properties, its average house price is two to three times higher than its competitors.

DeveloperAverage Selling Price
Barratt£320,000
Persimmon£237,000
Taylor Wimpey£300,000
Berkeley£603,000
Source: ShowHouse 2021 Figures

As a ‘luxury’ builder, Berkeley has been able to pass on most of its higher costs to its customers without impacting demand. This was evident in its FY22 results with management citing resilient demand for its properties.

Moreover, Berkeley’s exposure to London and the South East has allowed it to benefit from higher house prices, with the average house price in the capital costing £530,000. This is almost double of the UK average. More importantly, the lack of supply in these regions will most probably protect Berkeley’s top line from declining house prices.

UK House Price Index (April 2022)
Source: UK House Price Index (April 2022)

Built like bricks

Aside from its solid stock performance, Berkeley also boasts a solid balance sheet. Although its debt-to-equity ratio of 21% is slightly higher than that of its FTSE 100 peers, its cash position covers its debt comfortably. Additionally, it’s got the second highest profit margin in the industry, at 20.5%, which is also higher than the industry’s average.

Having said that, it mentioned free cash flow of -£131m in its latest results. This would normally alarm me, but this was down to the company’s recent acquisition of St. William. This free cash flow impact should be a one-off and the board expects positive cash flow ahead. The company sold 42% more homes last year after all, and has an order backlog worth £2.2bn, which is an increase from £1.7bn a year ago.

I think Berkeley could be a lucrative housebuilder for me to invest in, if not for one thing. A great deal of uncertainty lies ahead for the housing market, with a potential recession on the cards, the company may be vulnerable, even with its London exposure. For that reason, I’m not ready to buy Berkeley shares at the moment. Instead, I’ll be scouting for potential winners in the event of a stock market crash.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be considered so you should consider taking independent financial advice.

John Choong has no position in any of the shares mentioned. The Motley Fool UK has recommended Redrow. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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