Thursday 22 June 2017

Berkeley Group exposes the London housing/ land price bubble

So on the back of this Grenfell Tower fire there is a problem rehousing families in the immediate area. The area is split between council estates, some of the most expensive property in west London plus various infill developments of brown field land.

While I fully support rehousing locally and more generally I supported Labour's 1m affordable homes policy, something interesting has taken place.

Berkeley sold 68 apartments in a luxury block 'for build cost' or £10m, or £150k per flat, versus a supposed selling price in the market of £160m, or £2.35m per flat plus service charges.

Berkeley to me are doing a few things:

  • Revealing the ridiculous state of the prime housing bubble
  • Offloading inventory they probably cant sell
  • Killing the marketability of the remaining 60% of this development
  • Screwing the economics for Prudential, who are the financial backer of this '£2bn' project
  • Revealing Prudential to be a residential land speculator with a 6% construction value add to realise their land investment
  • I think they are probably offsetting a large social housing tax bill as well as a quid pro quo
The existing owners are not happy. You can support rehousing of these people without wanting a large number of social housing tenants to be living in your luxury building.

Apartment 7.10.2, a snip at £2.45m

It comes complete with a 'tonal' interior and future views of an adjacent flat.

Prices are already falling but when people see transparently that they are being asked to pay £2.5m for £150k of building costs it highlights the ridiculousness of it. Where does the difference go? 25% or so profit margin to the developer, a community infrastructure levy and social housing commitment, and most importantly land costs.

Looking at Berkeley Group they have the following key numbers for 2017 (2016):

Inventories £3.48bn (£3.26bn)
Payables £1.88bn (£1.77bn) (includes £974m of pre-sales)
Net assets £2.14bn (£1.8bn)

The market cap is £4.5bn. Google finance show little long term debt (despite the above leveraged balance sheet).

Their revenue was £2.72bn vs cost of sales of £1.78bn. So costs are 65% of revenue. The company discloses only £22m in plant, property and equipment.

Completed but unsold stock totalled £87.6m in April 17 from £18.1m the year before.

They are running a huge inventory position, although £2.74bn of that had been forward sold, to some lucky buyers, who in turn had posted £974m of deposits. However they had started the year with £3.25bn of forward sales, so that number dropped £500m.

So if they sold the Grenfel Tower flats at cost of build, ~£150k each, and the commercial selling price of these flats was supposedly £160m, build costs therefore are only 6.25% of the supposed £2.35m per flat selling price.

So where is the rest going? Basically the land is a gigantic speculative bubble. Prudential are speculating on this as the financial backer of this and five other developments with Berkeley across central London.

Also the trends are somewhat ominous, Berkeley is seeing a rise in unsold stock and falling pre-sales as a percentage of projects being built. This is happening at a time that the market is just starting to come off a bubble high. What will happen if they have to force sell into a 40% down market, like in Singapore?

Separately Jeremy Corbyn is thinking of ways to tax the bejesus out of the £2m or so of land value per flat.

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