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London’s White City sets the stage for two luxury stories

There are challenges at the margin for both Burberry and Berkeley

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.

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.

SoftBank reaps instant profit from Wirecard debt shuffle

Japanese conglomerate had agreed a Buffett-like investment in German group

SoftBank cut its exposure to Wirecard this week within hours of signing a strategic tie-up with the German payments company, in a move that could net the Japanese conglomerate a big profit while taking little risk.

SoftBank announced in April that it had agreed to pour €900m into Wirecard, providing a vital vote of confidence in the Aschheim-based company that has faced controversy over its accounting.

SoftBank did not purchase a stake in Wirecard, however. Instead it bought a convertible bond, a type of debt that can be repaid in stock rather than cash.

Wirecard’s shareholders gave final approval to the transaction on Wednesday, while also formally signing a “strategic cooperation agreement” with SoftBank. The following day, Credit Suisse sold a new €900m Wirecard bond that is exchangeable for stock to a broad group of investors.

The new deal effectively means that SoftBank has taken the money it invested off the table, in what SoftBank executives described as a “return optimisation” measure.

SoftBank and Credit Suisse declined to comment. Wirecard did not respond to requests for comment.

Analysts at brokerage Stifel said that Thursday’s deal offloads the “economic risk” of the Japanese group’s bet on Wirecard, adding that the deal effectively allows SoftBank to make good on its April commitment “without having to provide funding”.

SoftBank still has skin in the game, however, because Wirecard’s shares have rallied strongly since it announced the deal. The Japanese group has retained exposure to 3m shares — now worth around €450m — and can profit on these up to a share price around €230. Wirecard’s shares are currently trading at €149.

The Wirecard investment was made through a special fund managed by SoftBank Investment Advisers, which manages the group’s influential $100bn Vision Fund.

Capital for the deal came from SoftBank, some of its employees and Mubadala, Abu Dhabi’s state investment company, according to people familiar with the matter. Mubadala is the second-biggest backer of the Vision Fund after Saudi Arabia’s Public Investment Fund. Mubadala did not respond to requests for comment.

A senior SoftBank executive told the Financial Times that the Wirecard trade was inspired by Warren Buffett, who has a record of making highly structured investments in seemingly troubled companies that then benefit from his reputation.

Mr Buffett’s Berkshire Hathaway bought $5bn of preferred equity in Goldman Sachs during the height of the financial crisis, for example. This paid a hefty 10 per cent annual dividend and netted Mr Buffett billions of dollars of profit when the investment bank later bought back his stake.

The so-called “repackaging” of SoftBank’s convertible bond was sold to investors at less generous terms than those the Japanese group extracted from Wirecard.

While repackagings are relatively common for small deals, convertible bond investors and bankers said that it is unusual to see one conducted on such a large scale.

SoftBank frequently makes use of equity derivatives such as those seen on its Wirecard trade, often as a way of employing leverage — raising debt against its stakes that can be deployed on other investments. For example, a so-called “equity collar” on shares in Chinese internet giant Alibaba helped SoftBank raise the funds to buy shares in Arm, the UK chip designer, before a takeover bid in 2016.

SoftBank took profit on its Wirecard trade at a time when the group is coming under renewed scrutiny for its outsized bets on tech companies. Investors in SoftBank’s Vision Fund are braced for hefty writedowns on some of its investments. One of them, WeWork, has shelved its public listing while valuations for freshly listed Uber and Slack have tumbled.

Wirecard said its cooperation agreement with SoftBank would allow both companies to “pursue global growth opportunities and synergy effects, including through the SoftBank ecosystem in the fields of digital financial services, data analysis and artificial intelligence”.