Can Berkeley’s Ambitious Strategy Hold Up?

The City will be looking to see if Berkeley's ambitious plan to double pre-tax profit by 2015 remains on track when the housebuilder, which is predominantly focused on London and the South East, unveils interim results on December 2.

Berkeley was the first of the listed housebuilders to turn to the City for a rights issue to raise more capital after the onset of the economic downturn and raised around £50 million in February 2009. With the City looking for returns, in May 2010 Berkeley proposed to double pre-tax profits over the next five years lift the gross margin in the landbank by £1 billion to around £3 billion.

In the group's most recent market update in September 2011, Berkeley cheered the market by stating that "trading has been ahead of management expectations" and that the profit target would be met "at least" two years early. Around £1.7 billion will be returned to shareholders at a rate of £13 per share over the next 10 years in a series of dividends payable on milestone dates in September 2015, 2018 and 2021.

Berkeley also disclosed that at the end of August 2011, forward sales were in excess of £850 million (2010: £600 million), while Berkeley had achieved a significant number of planning consents and invested in work in progress in line with its strategy.

Glenigan's research shows the expansion on the planning front continues. In the 12 months to September 2011, Berkeley was the UK's fourth most active housebuilder on the planning front and submitted detailed planning applications to build a total of 4,796. The three housebuilders with the greatest amount of units in the planning pipeline in this period were Barratt (10,922 units) Taylor Wimpey (10,474 units) and Persimmon (10,011).

Berkeley's planning pipeline is concentrated on apartments, which comprise 82% of the units proposed in the most recent period. The balance of units is all houses. The company has a high exposure to London and 83% of the homes in the planning pipeline are in the capital, where Berkeley is the most active housebuilder on most measures and has tripled the size of its planning pipeline over the past year (Q3 2010: 1,137).

Berkeley's domination of the London new-build market is evident in Glenigan's data for the overall number of units proposed in this region. The group has plans for 3,989 units. The next most active housebuilder in planning terms is Asprey with proposals for 480 units and neither Taylor Wimpey nor Persimmon even feature in the top 10.

Although Berkeley retreated from Manchester some years ago with the sale of Crosby in 2005 for £235.7 million, the group remains active outside the capital and across southern England. In the South East, Berkeley has submitted plans to build 576 homes (Q3 2011: 853) and is ranked eighth in terms of planning activity. Berkeley also features in the top 10 in the South West with plans for 231 homes (Q3 2010: 103), ranking the group tenth.

Although the group operates predominantly to the developer/builder model, Berkeley does build homes in conjunction with other bodies. The group also lets work out to main contractors where appropriate. Glenigan's data suggests that, as Berkeley continues to step up its production more work is being built using external contractors.

In the 12 months to October 2011, Glenigan's data shows Berkeley as client on 11 projects with a gross construction value of £188.1 million. A year ago, Berkeley did not feature in the Glenigan's top 50 ranking of the industry's biggest clients but this latest total puts the group in 22nd position.

City analysts expect both re-assurances from Berkeley that the management's strategy is still on track, an improvement in numbers and wider guidance on the housing market.