Half-year Report

CHIEF EXECUTIVE'S REVIEW

Purpose, Long-term Strategy and Capital Allocation

Berkeley's purpose is to build quality homes, strengthen communities and make a positive difference to people's lives, using our sustained commercial success to make valuable and enduring contributions to society, the economy and natural world.

We are the only large UK homebuilder to prioritise brownfield land, as we progress 32 of the country's most complex regeneration projects, 27 of which are in delivery.  Each of these neighbourhoods is uniquely designed in partnership with local councils and communities and includes valuable public amenities alongside tenure-blind private and affordable homes. 

Berkeley is a unique, asset-focussed development business that seeks to manage risk and generate value through market cycles, with its inherent latent value rooted in its unrivalled land holdings.  We seek to find the optimum development solution for each site in terms of the social, environmental and economic value for all stakeholders, and the returns we deliver to our shareholders.  We firmly believe these objectives are mutually compatible and reinforcing. The pace at which we deliver homes from our land holdings is determined by the prevailing operating environment and we will always adopt a long-term approach, prioritising financial strength above annual profit targets.

Our capital allocation policy is clear:  first, ensure financial strength reflects the cyclical nature and complexity of brownfield development and is appropriate for the prevailing operating environment; second, invest in the business (land and work-in-progress) at the right time; and third, make returns to shareholders through share buy-backs and dividends.

Strategy Positioning - "Berkeley 2035"

The new Government's clear and decisive commitment to increase the delivery of new homes heralds a new era for home-building.  The prioritisation of brownfield development makes Berkeley, with its unrivalled land holdings, ideally placed to play a leading role in this new era. This support for the industry provides a more certain outlook into which businesses can invest, although we cannot ignore the impact of prolonged geopolitical and macroeconomic volatility in re-setting our strategy.

Berkeley 2035 is a clear strategy through which we can take advantage of opportunities that present themselves over the next 10 years. We are forecasting that we will have around £7 billion of free cash flow to deploy over this period into a combination of:

·      Land investment (replacement and new);

·      Investing in our Build to Rent ("BTR") platform; and

·      Shareholder returns - through share buy-backs or dividends

Berkeley will adopt an agile approach to capital allocation over this period, with the ability to flex a greater allocation to new land, its BTR platform or shareholder returns as the operating environment evolves. This is before introducing any external funding to the BTR platform and targets the initial allocation set out below:

Land Investment Strategy

Berkeley enters the 10-year period with land holdings comprising some 52,500 future homes (over 90% of which have at least an outline planning consent), with a further 13,500 in its pipeline. With detailed planning in place for all homes being delivered over the next 3½ years, Berkeley has excellent visibility over this period.  Beyond this, we will take the necessary time to work with all levels of government and local authorities to ensure each site has the appropriate development solution, aligned with local priorities and the needs of all stakeholders, prior to committing to delivery.

As greater certainty returns to the operating environment, accompanied by Government's support for brownfield development, we anticipate more land opportunities will meet our investment criteria which will allow us to target growth in the second half of the 10-year period.  We anticipate around £2.5 billion of available free cash flow will be required to replace the land being used in production over the next 10 years and target £6.0 billion of future gross margin in the land holdings at the end of the period, with a greater allocation possible should the operating environment be favourable.

Berkeley BTR Platform

In June Berkeley announced plans to establish its own BTR platform, identifying around 4,000 homes across 16 sites for an initial portfolio.  In the current operating environment, characterised by ongoing cost and affordability pressures, coupled with strong and increasing occupational and institutional demand, Berkeley believes that BTR will be central to the Government meeting its ambition for new homes during this Parliament.

Berkeley will therefore continually review the right allocation of its production to its own BTR platform, seeing this as an opportunity to accelerate delivery and create value for shareholders. The construction of the initial portfolio properties will absorb some £1.2 billion of free cash flow over the next ten years, with the optionality to grow the portfolio more aggressively should this be determined as the best course of action for delivering shareholder value.

Shareholder Returns

Berkeley's current plan for shareholder returns was put in place in 2011 and has returned £3.3 billion to shareholders over thirteen years, weighted towards the second half of the period, which ends in September 2025. This is an increase of £1.6 billion on the original plan which was to return £1.7 billion over 10 years.

Under Berkeley 2035, we are targeting a minimum level of shareholder returns of £2.0 billion over the ten years; £0.9 billion of which will be paid by 30 September 2030 and includes the remaining £260 million of the current shareholder returns programme to be paid by 30 September 2025.  Returns after September 2025 will be phased over the period and delivered through a combination of share buy-backs, to be undertaken on a dynamic basis, and dividends.

The actual level of shareholder returns will depend upon the extent to which the flexibly allocated free cash flow is deployed into additional land investment, an increase in scale of our BTR platform or other opportunities.

Flexibility to increase investment or shareholder returns

As the table setting out the initial allocation indicates, there is some £1.3 billion of capital that is yet to be allocated.  This can be deployed for additional investment in new land or BTR delivery, or used to increase shareholder returns as set out above.  Capacity for further investment or shareholder returns can be created to the extent third party funding (debt or equity) is introduced to the BTR platform over the next 10 years.

Conclusion

Berkeley 2035 incorporates the necessary resilience to navigate what remains a volatile near-term operating environment, while providing Berkeley with the flexibility to use its entrepreneurial property expertise to grow profitability, maximise the value and potential of our land holdings and BTR platform, and grow net asset value per share over the 10-year period, within a disciplined framework for capital allocation.

Over this time Berkeley will continue to focus on maintaining its operating margin at or above the long-term historic range of 17.5% to 19.5% and growing net asset value per share in line with its investment plans.

Shareholder Returns

The current shareholder returns framework was put in place in 2011 and is now based upon an annual return of £283 million up to September 2025, which can be made through either dividends or share buy-backs.

Shareholder returns during the six months ended 31 October 2024 totalled £242.0 million:

The dividend of £34.9 million (33 pence per share) was paid in July and the special dividend of £183.8 million (174 pence per share) was paid in September which completed the £283.2 million shareholder return for the year to 30 September 2024.  The special dividend was followed by a share consolidation which reduced the Company's share capital, net of Treasury and EBT shares, by 3.7 million shares (3.5%).

The £23.3 million share buy-backs were across 0.5 million shares (average price: £46.33 per share). 

Following the share buy-backs in the period, there is a residual £260.4 million to be returned to shareholders under the prevailing returns programme.  £33.6 million (33 pence per share) of this will be paid as an interim dividend in March 2025. Any residual amount, after accounting for share buy-backs, will be paid as a dividend in September 2025.

Housing Market and Operating Environment

Sales

Market conditions have been stable during the period, supported by the systemic undersupply of new homes in London and the South-East, strong employment levels and recent wage growth, alongside a supportive mortgage market and London's reputation as a leading global city.  These factors have been balanced by the impact of ongoing geopolitical risks and uncertainty around the domestic macroeconomic environment, with inflation tail risks heightened following the Autumn Budget.  

In these conditions, Berkeley's sales have been resilient at levels largely consistent with FY24 run rates, with a slight improvement in recent weeks.  Wandsworth Mills and Spring Hill (in Maidenhead) were launched during the period, securing a good level of early sales, alongside new releases at Westmont, London Dock, TwelveTrees Park, Bow Green, Royal Arsenal and Lombard Square amongst others.  Sales pricing for the period has generally been ahead of business plan levels, with cancellations at normal rates.  

As set out in the FY24 results announcement, these market conditions were anticipated, and the business positioned to operate accordingly.  Cash due on exchanged private forward sales has moderated to £1,510 million (30 April 2024: £1,701 million) and completed stock levels increased in line with expectations. 

Berkeley's core markets in London and the South-East continue to be, and are set to remain, structurally under-supplied.  Focussing on the capital, the latest MHCLG data reports new-build starts for the 12 months to June 2024 of just 8,450 (including private, PRS and affordable homes) below both the current London Plan target of 52,000 per annum and Government's newly identified target of 80,000 per annum. 

Land and planning

During the period, Berkeley acquired one new site; a strategic site in Berkshire for 220 homes, following the grant of a planning consent.

We have made good progress on the planning front in the recent weeks, with a resolution to grant planning permission obtained on five future sites in the land holdings and pipeline, including Bromley-by-Bow and Bath.  We have also obtained a resolution to grant planning permission for a new master-plan at the Green Quarter, Southall which will see the number of homes delivered on this site double.

We are now working with the respective Local Authorities to conclude the Section 106 agreements in a form that meets their local priorities and our own hurdle rates and will provide further updates on planning progress at the year-end.

At 31 October 2024, Berkeley's land holdings comprise 52,501 plots across 68 developments (30 April 2024: 54,081 plots across 70 developments), including those in the St Edward joint venture.  The plots in the land holdings have an estimated future gross profit of £6.72 billion (30 April 2024: £6.93 billion), which includes the Group's 50% share of the anticipated profit on St Edward's joint venture developments.

The net reduction in future gross profit during the period of £0.21 billion arises from the gross profit taken through the Income Statement, partly mitigated by the new site and market and optimisation movements, with some 20 planning amendments agreed in the period, including additional homes at London Dock, Wapping and Poplar Riverside.  The estimated future gross margin in the land holdings does not include the impact of new or revised planning consents until this is secured through the Section 106 agreement.  The estimated future gross margin is 25.0% (30 April 2024: 25.1%).

The estimated future gross margin represents Management's risk-adjusted assessment of the potential gross profit for each site, taking account of a wide range of factors, including current sales and input prices; the political and economic backdrop; the planning regime; and other market forces; all of which could have a significant effect on the eventual outcome.

The pipeline comprises approximately 13,500 plots across 13 sites at 31 October 2024.  This includes the sites at Bromley-By-Bow (2,100 homes) and in Brentford (2,100 homes), a St Edward joint venture site, pending finalisation of the Section 106 agreements for each site.

Positive momentum on planning

The Government's determined start to delivering its 1.5 million homes target has had a profound and hugely positive impact on the planning system, lifting the tone and encouraging a proactive approach to unblocking housing delivery at scale.    

We believe there are three key areas that, if addressed, will greatly assist in unlocking the full potential of well-connected urban land and see Government make huge strides in achieving its ambitious housing targets in the regions where homes are most needed. First, is ensuring we make the best possible use of brownfield land through increased density and intensification, which is wholly appropriate for many urban areas. Second, is the setting of clear priorities to ensure these get delivered. Specifically, the need for affordable housing to take priority in the planning system and be delivered directly by Section 106 agreements rather than more cash payments via inflexible mechanisms like the Community Infrastructure Levy. Third, removing the inefficiency and cost of duplicative and incremental local design guidance.

We therefore warmly welcome the Government's clear support for brownfield urban development, as set out in proposed changes to the National Planning Policy Framework, the emerging proposals for National Development Management Policies and the Government's recent working paper on making the most of urban development, which present valuable opportunities to cut through the excess of red tape and enable sustainable brownfield regeneration at far greater scale.

In the first six months of our financial year, Berkeley has provided over £300 million in subsidies to deliver affordable housing and commitments to wider community and infrastructure benefits. At over 150% of post-tax profit, this rate has doubled over the last ten years. Over the same period new starts across the industry in London have more than halved.

Construction

During the period build cost inflation for Berkeley has been stable at negligible levels.  There is a complex set of competing factors at play. First, we have seen downward market-led pressure due to the weak macro conditions which has led to lower new starts and construction output and the reduction in materials cost inflation. Upside cost risk comes from the impact of the recent increase in Employers' National Insurance Contributions and ongoing regulatory change, including the transition to a new regulatory regime.

Overall, Berkeley expects build costs to remain benign as we move into 2025 with the market remaining competitive in a subdued environment.  However, we are alert to the macroeconomic risk in this respect and continue to focus on efficiency to control costs while working with and supporting our established supply chain partners to ensure sustainability of the supply chain and delivery on our sites.

Berkeley's Build to Rent ("BTR") Platform

During the period, Berkeley has commenced the production of dedicated BTR buildings on six of its regeneration sites.  These buildings comprise 833 homes, over 20% of the initial portfolio of 4,000 homes:

The first of these homes will be delivered during FY27.  Berkeley will continue to assess the pace at which it allocates its capital to this initial portfolio, alongside potentially allocating further capital to its BTR platform, in line with the strategy announced today.

These BTR homes are included in the aforementioned land holdings plots and future estimated gross profit.

CMA investigation

In February 2024, the Competition and Markets Authority ("CMA") announced an investigation into possible anti-competitive sharing of information in the housebuilding industry.  We continue to cooperate with the CMA and its enquiries.  

Self-Remediation Terms and Contract

On 13 March 2023 Berkeley entered into the Self-Remediation Terms and Contract with MHCLG, under which developers have responsibility for any life-critical fire safety defects in buildings they have developed in the 30-year period to April 2022.

For the 820 relevant buildings Berkeley has developed over this period, we have third party assessments on over 95%.  All of the remaining buildings are where Berkeley is not the freeholder and has not yet been provided access.  There are 35 buildings where works are still to be completed, 11 of which are buildings where Berkeley is reimbursing Government for the works under the Developer Remediation Contract. Where works are required and yet to commence, Berkeley intends to begin works as soon as reasonably possible, subject to access being provided by the freeholder. It is Berkeley's preference to take full responsibility for all its relevant buildings and to complete any required works itself as this will speed up the overall process of remediation.  We are seeking recoveries from the supply chain and insurers where appropriate.

We welcome the new Government's collaborative approach to remediation and look forward to working with them to deliver our shared aspiration to complete required works as quickly as possible.  In conjunction with this, Berkeley continues to work closely with the new Building Safety Regulator, which together with the actions taken to date, should restore trust and confidence to the housing market, enabling it to operate efficiently, effectively and fairly for all.

Outlook

Berkeley is determined to play a full part in helping Government meet its ambition to deliver 1.5 million new homes over the next five years and fully supports the brownfield-led housing agenda to resolve the issues in the planning system. 

We have already experienced notable traction in the planning system in recent weeks brought about by the change in tone ushered in by the new Government.  This positive intent will lead to the delivery of more homes provided all levels of government now work with developers to deliver economically viable planning consents. 

The supply of new homes is unsurprisingly at a low ebb given the meaningful challenges faced by the industry across both the operating environment and market conditions in recent years.   While short-term risks remain prevalent, we are optimistic that we are close to the point of inflection when conditions become far more supportive of increased investment and growth.  Already, Berkeley has accelerated the production of 833 new homes on our existing regeneration sites through our BTR platform.

The scale of opportunity for a new era of homebuilding is substantial.   Berkeley's new 10-year strategy announced today is firmly rooted therein.  By investing more in the near-term, we can not only accelerate the delivery of much needed new homes, but also drive higher profits and returns to shareholders in the long-term through optimising our existing sites, acquiring new ones and investing in our own BTR platform to grow the long-term value of the company, while retaining financial strength.

Berkeley embarks on this new plan from a strong financial position with net cash of £0.4 billion, £1.5 billion of cash due on exchanged private forward sales and £6.7 billion of future gross margin in our land holdings, some 85% of which (by plots) is on brownfield land which is now widely recognised as the most sustainable way to solve the UK's housing crisis.   

Rob Perrins

Chief Executive