CHIEF EXECUTIVE'S REVIEW

Uniquely long-term operating model

Berkeley remains the only large UK homebuilder focused on the regeneration of complex large-scale brownfield projects at scale. We have built up the breadth of expertise, financial strength and holistic placemaking approach needed to transform these challenging sites into welcoming and sustainable places over the long-term.

Throughout the year we have continued to invest in this unique delivery model, adding ten new sites (6,650 new homes) to our land holdings, advancing a further 7,000 homes in our immediate pipeline, securing four new major planning permissions, increasing our investment in the ongoing transformation of live projects and growing our combined site and office workforce by over 12% (over 1,500 net additional jobs) compared to pre-pandemic levels.

As a result, Berkeley remains firmly on course to increase its housing delivery by 50% by 2024/25 from 2018/19 levels, as previously set out, and is in a fantastic position to drive the recovery and create the additional homes, amenities, jobs and training opportunities local communities need post COVID-19.

Holistic placemaking to create sustainable communities

Berkeley is now bringing forward 29 of the most complex and challenging regeneration projects in the country, including vast neglected spaces, which have fragmented local communities and deterred investment. We passionately believe that reviving sites like these is vital to reinvigorating our town centres and high streets, and to supporting the left behind communities who suffered most through the pandemic.  It takes many years of patient placemaking to stitch these vast spaces, once cut off from their local communities, back into the local fabric and to bring them to life with the right mix of homes, public amenities, parks and open spaces. This is inherently sustainable and Berkeley is the only developer doing it at scale.

We are holistic long-term placemakers, which means we work collaboratively with local communities to design completely unique, welcoming and inclusive neighbourhoods. For Berkeley, it means creating a place that works beautifully at a human level.  Somewhere welcoming, friendly and safe, where people will really love to spend time and feel part of the community. The process of placemaking always starts with local consultation and engagement, and we work very hard to seek out a diverse range of local people to properly understand their views, ensuring our plans complement and support their vision and goals.

We then continue working with the community, putting in place community plans to invest in the neighbourhood's social and cultural strength. These plans involve a mix of local events to get neighbours talking, and provide funding and support for residents to set up local clubs, groups and residents associations.  

Our Vision 2030: Transforming Tomorrow

Berkeley is the country's most ambitious and sustainable homebuilder and we unveiled our new Our Vision 2030 strategy in the year, which sets a holistic approach for our activities, while maximising our positive impacts on society, the economy and the natural world.  We intend to lead by example, working with our local partners to transform our sites and maximise the positive impacts for all stakeholders.

Our Vision 2030 sets ten strategic priorities for the coming decade, including the next phase of our leading climate action and nature recovery programmes, an expanded approach to environmental net gain and continuing our investment in a highly innovative model of precision manufactured modular housing.

Driving ambitious carbon action

Tackling climate change has long been a priority for Berkeley, and we successfully reduced the carbon impacts of our sites, offices and sales venues by 73% between 2016 and 2019 through adopting more efficient practices and procuring 100% renewable electricity.

We were the first homebuilder to deliver carbon neutral direct operations through voluntarily offsetting our remaining emissions, which we have done for four successive years, and we are the only UK homebuilder with an A Rating for Climate Action and Transparency from CDP. 

We are now pushing the boundaries even further, having become one of the first 350 companies in the world to commit to limiting global warming to 1.5°C through adopting ambitious, independently verified science-based greenhouse gas reduction targets. This commits Berkeley to:

·    reducing emissions from our sites, offices and sales venues by a further 50% between 2019 and 2030 on an absolute basis (on top of our standing reductions which already includes the procurement of renewable electricity for all UK consumption); and

·     reducing embodied carbon within our supply chain and the in-use emissions from our homes by 40% between 2019 and 2030 on an intensity basis.

These targets put Berkeley on a course to be a net zero business by 2040.

Leading nature's recovery

We are proud to continue leading the development industry in reversing biodiversity loss, which is the other great environmental challenge of our time. We were the first homebuilder to commit to delivering a measurable net biodiversity gain on every new site and have since built up a pipeline of over 40 projects, which together will create over 480 acres of new or improved natural habitats; an area the size of London's Hyde Park. 

This focus on biodiversity and delivering ambitious and beautiful natural landscapes has been of great benefit to the communities within and around our sites, particularly during the pandemic. 

The success of our programme led to the Government mandating that net biodiversity gain will become a national legal requirement for all developments, which could become law by the end of the year. Our first and most mature net biodiversity gain landscape, at Kidbrooke Village, was awarded the 2020 Sir David Attenborough Award for Enhancing Biodiversity by the Landscape Institute. 

We are now developing a more challenging approach, which will deliver a further valuable 'environmental net gain' on every project.

Modernising production

Berkeley has continued to develop our unique modular housing system, which is manufactured using highly automated and digitally integrated production technologies from the aerospace and automotive sectors. This will represent a major step forward for the homebuilding industry, enabling Berkeley to create a new generation of precision-made homes at a quicker pace to exacting standards.

Other anticipated benefits include a reduced carbon footprint at every stage of the product lifecycle, increased productivity, eliminating material waste, improved safety and complete golden thread digital record capture for every module produced.  

Our factory, located in Northfleet in Kent, will deliver up to 1,000 homes per year once up to full production, with each module leaving the factory floor fully fitted and finished.  This additional manufacturing capacity will help overcome the construction industry's long-term skills and recruitment challenges, which could otherwise constrain Berkeley's planned increase in housing completions. First production is scheduled for later this year.

Championing safer homes and operations

In September, we were honoured to be only the second company to ever receive the Diamond Award from The Royal Society for the Prevention of Accidents (RoSPA), in recognition for an "outstanding corporate contribution to raising safety standards across the residential building sector".

We have since co-written, launched and adopted RoSPA's Safer by Design framework, which sets out best practice housing design interventions to reduce the risk of common domestic accidents like falls, which lead to 6,000 accidental deaths each year in the UK. We are now making the case for Government to strengthen mandatory design standards for stair design as part of their ongoing reforms to building regulations, which can be achieved at no additional cost.

Strategy and Shareholder Returns, including Surplus Capital

Berkeley's purpose is to create homes, strengthen communities and improve lives, using its sustained commercial success to make valuable and enduring contributions to society, the economy and natural world. To achieve this, the Company's long-term strategy is to invest in opportunities with the right risk-adjusted returns, while ensuring that its financial strength reflects the prevailing macro environment, and to make returns to the shareholders who support the Company to achieve its purpose, through either dividends or share buy-backs.

Large-scale brownfield regeneration takes longer and is more complex and capital intensive than traditional housebuilding sites.  It typically involves uncertain timing from any one or combination of planning, remediation, clearing of planning conditions, utilities, CPOs, vacant possession and complex infrastructure works. When approached with great care and expertise it returns greater value to stakeholders over the long-term. Berkeley now has 29 of these long-term regeneration sites in its land holdings.

Over this last 12 months, Berkeley has added ten new sites to its land holdings, comprising some 6,650 homes, and added a further 1,500 through re-planning existing sites, increasing the estimated future gross profit in the land holdings from £6.4 billion to £6.9 billion.  In addition, Berkeley has either acquired or advanced a number of development opportunities that will come into the land holdings over the business plan period.  These represent a further 7,000 homes and will see Berkeley achieve its long-term target of increasing the estimated future gross profit in its land holdings to £7.5 billion. Within this near-term pipeline is a strategic land site in Milton Keynes, a retail park in Kew and two regeneration sites in St William.

Due to the nature of the new and the pipeline sites, cash spent on land has been only slightly higher than that used in the delivery of new homes in the year.  This is due to a number of factors associated with these sites, including timing of land payments, the extent of infrastructure and remediation costs on these sites and the fact that some sit within the St William joint venture.

Immediately prior to the pandemic, Berkeley had identified £455 million of cash that was surplus to its ongoing business plan requirements and that it planned to return to shareholders via a B share scheme, followed by a share consolidation.  This surplus cash was generated over the preceding three years as Berkeley delivered a number of central London developments acquired and designed at the end of the Global Financial Crisis.

With the onset of the pandemic, Berkeley obtained the support of shareholders to defer this return of surplus capital for up to two years to; firstly safeguard the business in the immediate aftermath of the pandemic and, secondly to ensure it had sufficient capital should significant incremental opportunities arise to add to its land interests.  The surplus capital would therefore be utilised to acquire incremental land or returned to shareholders as previously envisaged.

Following the progress made in the last twelve months, Berkeley ends the year with significantly enhanced land holdings and a strong cash position.  From this point, and given the current buoyancy in the land market, further new sites will be added selectively with Berkeley's strategic focus on continuing to invest in its joint ventures and unrivalled land holdings. 

This provides Berkeley with the visibility to commit to making the first half of the return of surplus capital through shareholder returns by 30 September 2021, six months ahead of the revised scheduled date.

The Company has already made £59 million of the £281 million shareholder returns for the current year through share buy-backs towards the end of last year and proposes to combine the remaining £222 million with the first half of the surplus capital return (£228 million) to create a £450 million payment to shareholders (approximately £3.70 per share). 

The Company further proposes that this is undertaken via a B share scheme, followed by a share consolidation, with the appropriate resolutions to be put to shareholders at the Company's Annual General Meeting on 3 September 2021.  This would see the Company's share capital reduce by around 8% (based on current share price) from 121.6 million to approximately 112 million shares.

Following this, the next scheduled shareholder return will therefore be the £141 million in respect of the six months ending 30 September 2022. 

Taking account of commitments on its existing sites, including those added in the year, and pipeline sites, Berkeley anticipates a large part of the second half of the surplus capital return will be allocated to land expenditure on these and new sites.

Summary of Performance

Berkeley has delivered pre-tax profits of £518.1 million for the year. This is from the sale of 2,825 homes (2020: 2,723) at an average selling price of £770,000 (2020: £677,000), reflecting the mix of properties sold in the year:

These are strong results.  Over the last two financial years, Berkeley has delivered just over £1.0 billion of pre-tax profits, which is in line with guidance at the start of the two year period.  Furthermore, Berkeley has returned £334.1 million to shareholders in the current financial year and, taking into account returns in previous financial years, is currently running £59 million ahead of the underlying shareholder returns run-rate of £281 million per annum. 

This demonstrates the resilience of Berkeley's unique long-term operating model, supported by its financial strength with net cash of £1.1 billion, cash due on forward sales of £1.7 billion and future gross profit in the land holdings of £6.88 billion.

Our long-term guidance remains unchanged which is for a 15% cumulative pre-tax ROE for the six years ending 30 April 2025, equating to an average annual pre-tax profit of approximately £500 million, which we remain firmly on track to deliver.  Specifically for the next two financial years we expect pre-tax profits to be at a similar level to the current year.

The shareholder returns of £334 million in the current financial year were delivered through share buy-backs of 4.4 million shares for £189 million (£42.76 per share average) and dividends of £145 million. Since January 2017, when share buy-backs were first introduced to the Shareholder Returns Programme, Berkeley has acquired 19.0 million shares for £703 million, at an average price of £36.99 per share and the annual return of £281 million currently equates to £2.31 per share; a 15.5% increase to the initial £2.00 per share.

Housing Market and Operating Environment

Sales

Berkeley has delivered a resilient sales performance in the year.  This reflects the enduring hallmarks of our long-term developments, epitomised through our focus on community, nature, connectivity and overall quality of place. 

Outside London, Berkeley has seen good demand aided by Government support for both the UK economy and the housing market in the form of the temporary SDLT holiday, which helped to stabilise the market following the initial impact of the pandemic.

In London, transaction levels have inevitably been impacted by the restrictions on travel and Berkeley's selective approach to market; deferring certain sales launches until restrictions are lifted and focusing on our established developments.  However, enquiry levels in London are now ahead of pre-pandemic levels, signalling the return of confidence to the London market as we emerge from the restrictions of the last 15 months.

Overall, as indicated in the March Trading Update, the value of our private sales reservations was 20% lower than the previous financial year.  Sales prices remain firm and above business plan levels and cancellation rates are at normal levels.  At its current level of sales, Berkeley is on target to meet its business plan over the next two years.

Our cash due on forward sales is £1.71 billion, compared to £1.86 billion a year ago, and provides a strong underpin to delivery over the next three years.  This represents the cash due on exchanged sales contracts which will be collected over the next three financial years and excludes secured sales in our joint ventures and forward sales to housing associations.  Berkeley's sales continue to be split broadly evenly between owner-occupiers and investors, with overseas customers continuing to see the long-term benefits of the London market.   Help to Buy reservations accounted for a net 403 sales in the year.

London and South East housing market fundamentals

The fundamentals of Berkeley's core markets in London and the South East remain strong.  Most prominent in this assessment is the ongoing undersupply of housing.  According to the latest Government assessment (MHCLG Indicative Local Housing Need (December 2020)), London's housing need is now 94,000 per year.  Over the last three years an average of 37,000 per year was delivered, an annual shortfall of 57,000 homes.  The recently adopted London Plan has set a target for housing delivery of 52,000 based on London's urban capacity to deliver homes. Even if this target were reached, this would still represent a shortfall of 42,000 homes or around 45% relative to London's housing need every year. The housing need across the Home Counties is now 69,000 per year.  Over the last three years an average of 53,000 per year was delivered, an annual shortfall of 16,000 homes.

In the short-term the undersupply in London looks set to worsen, despite current completions in the Capital having reached their highest annual level at 42,000 net additional dwellings (MHCLG live table 118).  However, this is unlikely to be sustainable with new starts falling to less than 15,000 per year for the last two years (MHCLG Live Table 253a), thereby constraining future new build supply.

In addition, interest rates remain at historically low levels and mortgage availability is strong with lenders reintroducing higher loan-to-value products and Government policy remaining supportive of mortgage lending.  Affordability levels remain within historical parameters for those with the requisite deposit.

Land and planning

During the year, Berkeley has made good progress in advancing its land holdings by the addition of a further ten sites, comprising around 6,650 future homes, and optimisation which has added a further 1,500 homes, including market movements.  Together these have seen future plots in the land holdings rise to 63,270 (2020: 58,413) which comprise estimated future gross profit of £6.9 billion (2020: £6.4 billion), including Berkeley's 50% share of its joint venture sites.

The six sites in the Berkeley business include, in London, unconditional purchases at Borough Triangle in Southwark, a site in Paddington adjacent to our West End Gate development and a retail site in Sutton, alongside a conditional long-term regeneration development at Plumstead for 1,750 homes on which we have secured planning consent in the year.  Outside London we have conditionally acquired a site in Wallingford, Oxfordshire and unconditionally acquired a site in Redhill, Surrey.

St William has added a further four sites to its land holdings, contracting sites, conditional upon planning in Stratford, Bracknell, Mitcham and Romford.

As outlined in the Strategy Review section, Berkeley's focus will be on investing in its joint ventures and land holdings to continue to bring its sites forward for delivery with further new land added selectively given the current buoyancy in the land market.

We have secured six new planning consents in the year.  These include four consents on long-term regeneration  developments; Malt Street in Southwark for 1,350 homes, Silk Park, Barnet for 1,300 homes, Eight Gardens in Watford for 1,200 homes and at Plumstead for 1,750 homes, alongside two other consents for a St Joseph site at Stratford-Upon-Avon and a site at Hildenborough in Kent.  We have also obtained over 40 revisions to existing consents as we continue to evolve our sites.

During the year, the Planning Reform Bill was presented to Parliament. This proposes significant changes to the planning system and will require careful implementation to ensure it does not create a hiatus as local authorities and other stakeholders transition between regimes.  In respect to the proposals for a new consolidated infrastructure levy, Berkeley recognises this is appropriate for smaller sites, but it does run the risk of impeding the delivery of large regeneration projects, which each have unique challenges that require locally negotiated solutions, with empowered local stakeholders and councils at the table.  We are similarly concerned that the proposed introduction of mandatory design codes, as part of the planning reforms, will not be able to take into account the constraints and opportunities presented by complex regeneration sites.

Berkeley has a strong planning position in its land holdings with 89% of plots having a planning consent, which includes outline consents covering all homes on long-term regeneration developments. 

Construction

Berkeley is currently in an investment phase as it brings forward into delivery its portfolio of large, complex regeneration sites acquired since the Global Financial Crisis. 

Six sites have been moved into production during the year, including five long-term regeneration developments; TwelveTrees Park, West Ham (3,800 homes), St William's Poplar Riverside (2,800 homes), Silk Park, Barnet (1,300), Horlicks Quarter, Slough (1,300 homes) and Camden Goods Yard (700 homes). 

Berkeley now has 23 of its 29 long-term complex regeneration developments in production.  Over the next three years, we are targeting net investment into the balance sheet of around £700 million, split evenly between land and work in progress, as we increase the delivery of new homes by some 50% by the end of the business plan period (2024/25), compared to pre-pandemic levels (2018/19).

Following a period of stable build costs during 2020, we have seen these rise to around 4% per annum since the start of 2021.  The increase reflects the cost of materials with rising construction activity causing strong demand for construction products, at a time when supply chains are adjusting to the combined impact of the UK's exit from the EU and COVID-19.  This has also precipitated a tightening in material availability with lead times increasing for certain products. 

Berkeley's stance to continue production activity uninterrupted throughout 2020 strengthened our relationships with subcontractors and manufacturers and we continue to work with our supply chain partners to manage the supply constraints and maintain our production levels.

Berkeley is very supportive of the Government in its determination both to ensure buildings are safe for the people that live in them and to implement the recommendations of Dame Judith Hackitt's review of building safety.  The last year saw the introduction of the Fire Safety Act and the Building Safety Bill, both of which are intended to strengthen and improve different elements of the building safety regime, so that confidence in tall buildings can be properly and fully restored. As part of our own drive for continuous improvement, we will ensure that our procedures will be compliant with the new legislation ahead of its anticipated implementation, and are well advanced in this regard.

Berkeley adopted a leading role in the establishment of the current EWS1 process to demonstrate the safety of buildings over 18 metres and we continue to engage with MHCLG and other stakeholders to identify a stable, holistic and comprehensive long-term process that will allow the safety of all buildings to be assessed, based upon science and risk assessment. This will ensure the housing market can operate efficiently, effectively and is fair for all.

The Berkeley Foundation

The positive long-term impacts of The Berkeley Foundation came to the fore during the pandemic as the charities and programmes it support provided vital capacity to meet a sudden increase in needs among vulnerable communities. 

One fantastic example of this is Kitchen Social, our partnership with the Mayor's Fund for London, which has built up a food distribution network over the last four years targeting children at risk of food poverty during school holidays. As the pandemic set in, Kitchen Social expanded to supply more than 500 vulnerable households facing real hardship.

The Foundation has awarded £660,000 in emergency COVID-19 funding during the period to help charity partners cope with a fall in funding, greater demands on their services and complex operating restrictions. The Foundation also maintained its existing funding commitments, of over £2 million in the year, and activities throughout the period and is delighted to have renewed its partnership with Imperial College, which encourages young people to develop STEM skills for the future, and expanded its funding to the Change Foundation to support the award-winning Street Elite programme, that helps disadvantaged young people find pathways into employment, education or training through sport. 

Outlook

Berkeley is well placed to continue delivering for our stakeholders as the economy continues to re-open, following 15 months of unprecedented disruption from the COVID-19 pandemic. Throughout this period Berkeley has sustained production and continued investing in the future, adding ten new sites to our land holdings and moving five large complex regeneration sites, covering some 10,000 new homes, into production.

Berkeley remains committed to London.  We fully recognise the impact of COVID-19 and the important conjecture and debate around the future of cities. However, we firmly believe that this does not represent a permanent structural shift that has the capacity to reverse urbanisation or detract from the attraction of a global city such as London, with all that it has to offer in terms of culture, entertainment, education, recreation and business.  It is a deeply under supplied market and Berkeley's unique approach to placemaking with its focus on community, nature, connectivity and overall quality of place will resonate with customers even more as the country emerges from the pandemic.

Berkeley has an ambitious plan for the future, underpinned by its Vision 2030: Transforming Tomorrow strategic priorities, and the position of strength with which it begins the period.  Achieving this transformative plan, including its stretching targets for carbon reduction and increased delivery of new homes, requires significant investment for which it is essential to have the necessary conditions for growth in place.  We are therefore mindful that the level of investment will be constrained by the coming increase in Corporation Tax and the new Residential Property Developer Tax. It is also important to a have stable regulatory environment that allows business to innovate.

We are excited about a future where Berkeley will be at the forefront of this transformation.

Rob Perrins

Chief Executive