CHIEF EXECUTIVE'S REVIEW

Purpose, Long-term Strategy and Capital Allocation

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

Berkeley is the only large UK homebuilder to align with Government on prioritising brownfield land, as we progress 32 of the country's most challenging regeneration projects, 26 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 both the social, natural and economic value for all stakeholders, and the returns we deliver to our shareholders.  We firmly believe these two 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 dividends and share buy-backs.

Strategy positioning for today's environment and outlook

Berkeley responded to the softening sales market conditions through 2022, which accelerated from the end of September 2022, by focussing on delivering our forward sales, matching production on existing sites to demand and limiting new investment in land. 

This enabled Berkeley to deliver pre-tax profit for FY23 in line with pre-existing guidance and we are on track to meet our FY24 and FY25 aggregated guidance (at least £1.05 billion of pre-tax profit), while maintaining operating margins and our financial strength.  At the end of October 2023, we have net cash in excess of £400 million, cash due on forward sales of £2 billion and land holdings future gross margin of £7.2 billion across a large portfolio of fantastic long-term brownfield regeneration sites in and around London.

During the last six months, macro volatility has increased, domestically and abroad, with the prospect of UK interest rates remaining higher for longer and weak economic growth projections.  Against this backdrop, the sales market lacks urgency and Berkeley's net reservations for the six months to 31 October 2023 have been around a third lower than the average rate throughout FY23.  We anticipate the sales market will remain subdued before inflecting in its normal cyclical manner once there is greater confidence in a downward trajectory for interest rates and economic stability returns.

On the supply side, the sharp build cost rises of recent years have now responded to the prevailing conditions and, for Berkeley, cost inflation across the majority of trades has receded to negligible levels in line with our expectations.  The greater supply chain risk is now that of contractor insolvency as the inflation cycle reverses and demand for construction services reduces. 

Most significantly for future housing delivery, the planning and regulatory environment continues to evolve and remains highly complex, uncertain and unpredictable.

At a national level, this includes: the changes to the National Planning Policy Framework ('NPPF'), and their impact on the efficacy of local plans; the Levelling Up and Regeneration Act; the requirements for second staircases in tall buildings, which are still not finalised; recent updates to building regulations on energy efficiency, ventilation and overheating; the requirements of the Future Homes Standard; the introduction of the 4% RPDT (with further levies being consulted upon); the Self-Remediation Terms and Contract; and the introduction of the new Building Safety Regulator and associated new regulation.

At a local level in London, this includes: policies and guidance around building standards and energy performance, layering additional requirements on those set centrally; and the design and space standards in the recently published London Design Guidance.

We are wholly aligned with the ambition to build more quality affordable and private homes where they are most needed, and to play our full part in meeting the country's net zero target.  However, the burden of achieving this, at a time when the economy is adjusting to more normal conditions following a decade of zero interest rates, must be recognised and priorities set, as housing cannot continue to cross-subsidise at these levels, without increased public funding.  In addition to this, the industry is currently the subject of a Competition and Markets Authority study with which we are fully and openly participating.

The longer the status quo continues, the more the adverse impact on current and future supply is compounded and capacity within the industry is reduced, with SMEs particularly affected, as the number of new homes being started, already well below the recognised need, will continue to decline.

Consequently, during the last six months, Berkeley has taken further steps to de-risk and reposition the business plan to reflect the current operating environment. Despite this challenging backdrop, Berkeley's business model continues to be resilient with good forward visibility:

Near-term (FY24, FY25 and FY26)

·   Berkeley is targeting at least £1.5 billion of pre-tax profit across the three years combined, based upon current market conditions; extending guidance by 12 months.

·    Operating margins are expected to be within the long-term historical range (17.5% to 19%).

·   While the sales market remains subdued, cash due on forward sales will moderate from the current position of £2 billion and Berkeley will carry higher completed stock levels than in recent years.

·  Berkeley will continue to review the development solution on all its sites to achieve the optimum outcome for all stakeholders, including accommodating our best current assessment of the impact of evolving regulations, such as the requirements surrounding second staircases in buildings over 18 metres.

·    In the absence of material new land investment, the land holdings future gross margin will be targeted at around £6 billion at the end of this period.

·   Pre-tax ROE will be above 15% for the period as a whole, but is likely to fall slightly below this for FY26.

Medium-term (FY27, FY28 and FY29)

·   Until the planning and regulatory environments unlock, alongside an inflection in the sales market, pre-tax profitability is anticipated to remain around the level to be delivered in FY26.

·   The focus will be on maintaining operating margin through our added-value approach to each site's development solution and ensuring our operating costs are aligned to the size of the business.

Capital allocation flexibility

·    We are on track to continue with the current shareholder returns programme into the future but remain agile and ready to switch our capital allocation emphasis to new investment should market conditions and the operating environment present a compelling opportunity.

·   If Berkeley does not recommence deployment of capital into new investment opportunities by 30 April 2027, we anticipate returning around 100% of the profit after tax earned over this period (from the start of the current financial year) to shareholders, while maintaining financial strength and ensuring we can deliver our cross-cycle 15% pre-tax ROE target.

This strategic positioning draws on the Company's experience of operating across the market cycle and represents a responsible approach to ongoing elevated uncertainty and volatility, but also ensures Berkeley retains maximum flexibility for the prevailing conditions.

Shareholder Returns

The current shareholder return framework is based upon an annual return of £283 million through to September 2025, which can be made through either dividends or share buy-backs, subject to a dividend underpin of 66 pence per share (approximately £70 million).

If the scheduled £283 million annual shareholder return has not been delivered by the dividend underpin or share buy-backs, the balance will be returned in September each year and will be accompanied by a share consolidation, unless the balance is deemed de minimis for these purposes.  This will be effective from now and includes the return due to be made by 30 September 2024. It reflects the strategy set out above and is consistent with the approach taken to the 2021 B-share return of capital, which was also accompanied by a share consolidation.

Shareholder returns during the six months ended 31 October 2023 totalled £127.6 million:

The dividend of £63.1 million was paid in September (59.30 pence per share) which completed the £283 million return for the year to 30 September 2023.

The £64.5 million share buy-backs were across 1.7 million shares (average price: £39.01 per share).  Of this, £43.1 million pertained to the £283 million return for the year to 30 September 2023 and £21.4 million pertains to the current £283 million return due by 30 September 2024. 

The annual return of £283 million for the year to 30 September 2024 currently equates to £2.67 per share.

Housing Market and Operating Environment

Sales

For Berkeley, the value of underlying private sales reservations for the first half is running around one third lower than the levels secured throughout the 2022/23 financial year, reflecting the sharp increase in interest rates from September last year and the ongoing elevated political and macro volatility.  Pricing has been above our business plan levels, reflecting the systemic under-supply in our core markets, and cancellation rates have been in the normal range.

Berkeley's cash due from underlying private forward sales remains strong at £1.96 billion at 31 October 2023, compared to £2.14 billion at the start of the financial year.  This will moderate during the second half of the year unless sales rates return to FY23 levels.  With customers more attracted to immediately available homes in this market, Berkeley expects to carry higher levels of completed stock relative to recent years, as it maintains build programs on existing phases.

Current supply in our core markets is historically low.  Focussing on London, the latest DLUHC data demonstrates this with new starts for the 12 months to June 2023 of 20,500 including private, PRS and affordable homes, substantially below both the current London Plan target of 52,000 per annum and Government's identified local housing need of 94,000 per annum. 

Land and planning

Berkeley has added two new sites outside London to its land holdings during the period, one of which is in the St Edward joint venture and has been transferred from the pipeline:

·      199 homes in Maidenhead, Berkshire following receipt of a planning consent, and

·     470 homes in Guildford, Surrey where a resolution to grant consent was obtained in October 2023 (St Edward).   

In addition to these two successes, Berkeley received a planning consent on its land parcel adjacent to West End Gate, Marylebone for 550 homes following a Mayoral Hearing in March 2023 pursuant to the GLA's call-in of the application in November 2021, and has obtained some 20 amendments to planning consents on existing sites.

While these are positive outcomes, Berkeley continues to experience significant delays in advancing its development proposals through the planning system.

At 31 October 2023, Berkeley's land holdings comprise 56,107 plots across 71 developments (30 April 2023: 58,045 plots across 73 developments), including those in the St Edward joint venture.

The plots in the land holdings have an estimated future gross profit of £7.25 billion (30 April 2023: £7.63 billion), which includes the Group's 50% share of the anticipated profit on St Edward's joint venture developments. The net reduction in gross profit of £0.38 billion principally arises through the gross profit taken through the Income Statement, with the two new sites added partly mitigating the impact of market movements and regulatory changes on the anticipated future gross profit in the land holdings.  Consequently, the estimated future gross margin is 25.4% (30 April 2023: 26.2%). 

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 2023 (30 April 2023: 14,000 plots on 14 sites) following the transfer of Guildford to the land holdings.

Construction

Against a backdrop of reducing new homes supply and falling construction output, build cost inflation for Berkeley in today's market is at negligible levels apart from some isolated trades where demand is high.  For the early trades and those most impacted by the decline in orders we are already seeing some reductions in current tender pricing.  We expect these market-led dynamics to continue placing downward pressure on build costs, but this is balanced by the costs associated with ongoing regulatory change.

Given the elevated macro uncertainty, Berkeley continues to work with and support our established supply chain partners to ensure sustainability of the supply chain and delivery on our development sites.

Self-Remediation Terms and Contract

On 13 March 2023 Berkeley entered into the Self-Remediation Terms and Contract with DLUHC.  Under these terms developers have responsibility for any life critical fire safety defects in buildings they have developed in the last 30 years. For the 815 relevant buildings Berkeley has developed over this period, it has third party assessments on over 90%. The majority of the remaining buildings are where Berkeley is not the freeholder. There are 34 buildings where works remain to be completed, 15 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.

Looking forward, Berkeley is ensuring its procedures are compliant with new legislation and is working 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

While trading conditions and the operating environment remain volatile and unsupportive of investment, Berkeley has focused on its existing sites, as opposed to new investment, and has maintained the strong position with which it entered the year. Currently this is:

-     £422 million of net cash (FY23: £410 million)

-     £2.0 billion of cash due on forward sales (FY23: £2.1 billion)

-     £7.2 billion of future gross margin in its unrivalled land holdings (FY23: £7.6 billion)

This means we are well placed to respond quickly as the operating environment unfolds, providing strategic optionality over capital allocation to maximise returns to shareholders over the long-term.

Irrespective of our strategic positioning at any point in time, we will continue to fulfil our purpose and transform the most challenging sites into exceptional places, yielding a long-term positive impact for society, the UK economy and natural world. We will continue to advocate brownfield regeneration as the most sustainable way of solving the UK's housing crisis, through which years of patient investment and placemaking has established popular mixed use neighbourhoods and a strong sense of community.

Rob Perrins

Chief Executive