Home London’s White City sets the stage for two luxury stories
September 23, 2019
Even at 163 years old, Burberry can still draw a crowd. A runway show for the fashion label’s Spring/Summer 2020 collection this week drew stars such as Carla Bruni and Dua Lipa all the way to the frumpy west London neighbourhood of White City. For a brand that has spent half its life trying to avoid fashion’s backwaters, the location was a brave choice.
White City, for those unfamiliar, is an urban regeneration project criss-crossed by main roads that serve Westfield shopping centre on its southern border and Wormwood Scrubs prison to the north. Burberry’s chosen venue was the Troubadour, a temporary theatre built in a former BBC overspill car park. It was slotted together flat-pack style between construction zones to add some prefabricated glamour to a site once known as a gathering point for cocaine dealers.
The need for such cultural airdrops lies across the road. Berkeley Group, the FTSE 100-listed housebuilder, has added more than 1,800 apartments to the area with a 10-acre scheme it calls White City Living. A sales pitch delivered to investors in Hong Kong hotel suites leaned hard on exclusivity, with namechecks given to the designer brands on sale at nearby Westfield. The message was simple: these were luxury goods. The luxury could be synthesised.
Burberry has, of course, been going through its own regeneration project. The arrival last year of Riccardo Tisci as chief creative officer caused a gush of enthusiasm its story previously lacked. The FT review of Spring/Summer 2020 says Mr Tisci “elevated T-shirts, sweatshirts and trainers to high fashion”.
Whether Mr Tisci can elevate profitability is more of a concern. His push upmarket ought to translate into higher prices, improved direct retail sales — which are higher-margin — and fewer discounts. All this should help Burberry’s earnings margin, which at 15 per cent before interest and tax is nearly 9 percentage points below the luxury sector average. Burberry’s target of 20 per cent margins by the end of 2023 will require revenue to grow given that the cost base has lost some flexibility since Mr Tisci’s team joined the payroll.
Margins are less of a worry across the road. Berkeley bought the White City plot in 2013 for just £100m. Based on a construction cost of £500 per sq ft, the scheme should now be delivering gross margins north of 40 per cent, Jefferies analysts have estimated.
Nor is White City an exception. Berkeley has similar designs on uncelebrated London boroughs including Merton, Enfield and Tower Hamlets. Land bought before 2015 supplies approximately two-thirds of a build pipeline that can carry Berkeley to the middle of the next decade, Jefferies figures suggest. The broker estimates gross margins on the group’s biggest regeneration projects at between 32 per cent and 47 per cent.
Berkeley’s group margin is expected to hold steady at about 26 per cent this year and next. A management target of between £500m and £700m in annual profit to 2025 bakes in some weakness in later years but, given its success building prime property on subprime land, that could prove conservative.
Aspirational pricing is something in common for Berkeley (whose £620,000 entry-level flat in White City costs about 17 times the average London salary) and Burberry (whose cashmere car coat costs more than a third of the city’s average yearly gross disposable income). But it is not the only similarity.
Friday, 20 September, 2019
The Asia-Pacific region provides more than 40 per cent of Burberry’s annual revenue, with 10 per cent alone coming from Hong Kong. Berkeley’s own exposure to Hong Kong unrest is harder to estimate but, given investment purchases make up about half its unit sales and the majority of buyers are overseas, the sums are likely to be significant.
Political risks closer to home involve Brexit, of course, but also Help to Buy. A report from the Commons public accounts committee this week found the government’s flagship housing policy had inflated new-build prices by giving loans mostly to people who did not need them, with no thought given to what happens when the scheme ends in 2023.
And while Berkeley is nowhere near as reliant on Help To Buy as peers, its margins reflect the housing market imbalances that politicians have failed to fix.
All of which brings us to the one big difference.
Burberry trades at 23 times this year’s profit, falling to 20 times by 2021. Berkeley trades at nine times profit, rising to 12 times by 2021. The divergent valuations as we head into the next decade reflect the good times rolling for Burberry and the opposite happening to Berkeley.
But given the political risk in both stocks, and the market’s shoddy record of anticipating political outcomes, investors can be forgiven for thinking it is not going to be that simple. Fashion, like politics, rarely proves that easy to predict.