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London housebuilder Berkeley Group is taking a more cautious approach to buying land, in a sign that a cooling housing market and high inflation may slow development activity in the capital.
The FTSE 100 group said on Tuesday that with expectations of a property downturn growing and cost inflation running at between 5 and 10 per cent, “new land will only be added to the land holdings very selectively”.
Rising costs will weigh on development across the industry. But they are a particularly difficult for private residential developers in London, which were already struggling to compete in the land market, according to Rob Perrins, Berkeley’s chief executive.
He said tariffs on housebuilders to deliver new affordable housing, improve infrastructure and ensure development was environmentally friendly made competing with office or warehouse developers increasingly difficult.
“Because of taxes on residential, other uses have higher value: hotels and industrial in zones 1 and 2 and industrial in zones 3-6 . . . that’s why private housing starts have halved since 2015, and I think will halve again,” he added.
Work started on 16,673 new homes in the capital last year, fewer than half the 33,792 started in 2015, according to data provider Molior London. Mayor Sadiq Khan has focused his efforts on boosting affordable housing starts, which are up over the same period.
Despite the extra costs, Berkeley said it expected to book a pre-tax profit for the year to the end of April 2023 of £600mn, up from £552mn in the previous financial year and in line with expectations.
Berkeley’s share price rose 4 per cent to £35.92p on Tuesday, recovering from a dip last week after analysts at HSBC predicted house prices in London could fall as much as 15 per cent and downgraded the company.
Berkeley added that there was still strong demand from buyers and that it was selling homes for more than it had anticipated.
The company benefits from a strong balance sheet and the chronic undersupply of houses in the UK, according to Ami Galla, an analyst at Citi.
But “weak consumer confidence, tight affordability and political uncertainty have seen a steady drop in house prices in London,” she said in a note.
Berkeley already has a large land bank in London thanks to a deal struck with National Grid in 2014. The utilities company sold its stake in that joint venture earlier this year, and Berkeley can build until 2028 without requiring new sites, said Perrins.
The company is considering bidding on two sites outside of London, but is not looking at anything within the M25, he added.
Berkeley also narrowly signed off on a remuneration plan that could see Perrins take home £8mn a year, and other directors as much as £3.25mn in total subject to the company’s long term share price performance. The plan was approved at Tuesday’s AGM, but 40 per cent of shareholders voted against it.
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