Property & Construction Daily

The Property & Construction Daily provides a sector-specific comment from leading analyst Alastair Stewart. His daily perspective provides a round-up of market statements, news, economics and views from the property and construction sectors.

<< Back to Property & Construction Daily archive

November 16, 2022

House prices stable, inflation soars, and Khan follows Sturgeon in rent-freeze call; death from mould ‘a defining moment for housing’

Company news

British Land Company(BLND, 396p, £3,672m mkt cap)

Leading UK commercial property investment, development and services group. HY (Sep) results. Net rental income +4.1%, £251m; u-lying PBT +13%, £137m; stat PBT, -£22m (H1 21, +£373m), after -£159m capital and other items, including -£189m valuation movement (H1 21, +£219m); u-lying EPS +12%, 14.5p; div +12%, 11.6p. EPRA TNAV -4.4%, 695p; adj net debt, £2,977m (Mar 22, £3,458m); LTV, 30.7% (32.9%); portfolio valuation, £9,643m (£10,467m). Trading: Total lettings and renewals, 1.5 m sq ft (H1 21, 1.8 m sq ft); committed and recently completed development, 1.7 m sq ft, all net zero (2.0 m sq ft). Total valuation movements reflect 17 bps increase in yields and +1.2% ERV. Outlook: “We are now operating in a significantly different environment. Rapid inflation has led the Bank of England to initiate an interest rate hike cycle and 10-year gilt rates are significantly ahead of the level six months ago, albeit below recent highs. This has directly impacted property yields with the effect most pronounced in lower yielding assets. Looking forward, we currently expect to see yield expansion across our business in the second half. However, this impact will likely be cushioned by rental growth across our key markets. We are proactively managing our risk. On our committed London Campus developments, we have fixed 92% of costs and pre-let or placed under offer 34% of the space (40% of offices pre-let or under offer). Given a lack of new supply, we expect to achieve higher rents on the remaining space. Looking forward, we have a very attractive development pipeline across our Campuses of 7.3 m sq ft; there is a possibility that inflation next year is lower than our forecast with early signs construction capacity is increasing. Vacancy across prime London office space remains low and availability of new, best in class space is scarce. We now expect ERV growth of between 2 – 4% over the next 12 months with rental growth at our developments likely to exceed these levels. In Retail Parks, the underlying fundamentals are favourable. Supply is tight, with retail parks accounting for 10% of the total retail market and our occupancy is 97.5%. As a result, we expect to be able to build on the rental growth achieved in the first half to deliver ERV growth of between 1-3%. For shopping centres ERV declines moderated in the half and based on our most recent leasing activity, we would expect this to continue. In Urban Logistics, the market in London is chronically undersupplied and demand remains strong, underpinned by the continued growth of same day delivery. We expect strong rental growth of 4-5 % pa. We go into the second half with a strong leasing pipeline focused on markets where we have pricing power. The disposal of stakes in Paddington Central and Canada Water strengthened our balance sheet and combined with the quality of our platform and our continued commitment to capital recycling, mean we are well placed to exploit our attractive development pipeline and the opportunities now emerging in the market”.

 

Economic data

House prices. Average UK house prices we unchanged at £295,000 between August and September, bringing the Y/Y increase down to 9.5% from 13.1% in August, according to the ONS (link). Average house prices increased over the year to £314,000 (9.6%) in England, to £224,000 in Wales (12.9%), to £192,000 in Scotland (7.3%) and to £176,000 in Northern Ireland (10.7%). The September 2021 comparator reflected the end of the Stamp Duty holiday. This forms part of government inflation data (link), which today registered CPI of 11.1% for the year to October, up from 10.1% in September and above consensus estimates of 10.7%. On a monthly basis, CPI rose by 2.0% in October (cons, +1.7%), up from +0.5% in September. Despite the introduction of the Energy Price Guarantee, gas and electricity prices made the largest upward contribution; rising food prices also made a large upward contribution to change with transport (principally motor fuels and second-hand car prices) making the largest, partially offsetting, downward contribution to the change in the rates. Viewpoint: Given the degree of the overshoot to consensus in the annual CPI rate, the negative but muted reaction by Gilts (a key driver of mortgage fixed rates) and housebuilders’ share prices so far this morning seems to suggest markets believe this may be just about as bad as it gets. The next announcement, on 14 December, will provide more evidence.

In other news …

Lettings market. Sadiq Khan steps up calls for London rent freeze, Property Week (link, paywall). The London Mayor has called an emergency summit urging the government to freeze rent rates. The summit, on 14 November, followed research from the Greater London Authority and YouGov indicating over 40% of Londoners would struggle to pay their rent within six months. It also found that an estimated 500,000 private renters in London were facing possible eviction. Private landlords were not invited to the summit; the National Residential Landlords Association reacted that it was “disappointed in the extreme that the mayor of London feels he can solve the challenges faced in the capital’s rental market without any input from those who actually provide the homes. The reality is that while the demand for private rented housing in London continues to increase, the supply of such homes is falling”. Viewpoint: Pressing as renting levels are, the Mayor should look to the freeze imposed by Scotland’s First Minister, Nicola Sturgeon, which appears to have all but stopped new build-to-rent activity in its tracks and past experience of social housing rent cuts by former Chancellor George Osborne, which contributed to financial turmoil for housing associations.

 

Housing safety. The death in 2020 of two-year-old Awaab Ishak from prolonged exposure to black mould in his family’s flat should be a “defining moment” for the UK’s housing sector, The Guardian (link). Senior coroner Joanne Kearsley issued the view after concluding his death was the result of a severe respiratory condition caused due to prolonged exposure to mould in his home, owned by social housing provider, Rochdale Boroughwide Housing (RBH). About 450,000 homes in England have problems with condensation and mould. England’s housing ombudsman, Richard Blakeway, said landlords must make plans to tackle the “real risk of worsening damp and mould issues” as energy bills soar. Housing Secretary Michael Gove, criticised RBH, but said the Government had been too slow to toughen regulation of social housing. A separate report by the BBC (link) suggests there has been some improvement in the last decade, but much more to be done. In 2010 over 7% of social rented properties had damp, and now it’s 5%, but still 200,000 homes. Just 2% of owner-occupied properties are damp, around 300,000 homes. It is the private rented sector where problems are worst. Again, not as bad, but almost 10%, or 400,000, homes have damp problems. There have been calls for damp and mould to be given the same legal standing as gas safety and legionella, compelling landlords to sort it out or face prosecution. The government is also looking to introduce a legally binding decent homes standard in the private rented sector, matching rules already in place for social housing. Viewpoint: With Gove invoking Grenfell, there is likely to be urgent action for insulation and, critically, ventilation improvements in the social housing sector, and somewhat more slow-burn pressures for the existing private rental stock. However, this could deplete other social housing repair and maintenance work as well as new development, since councils and HAs face post-Grenfell recladding and financial pressures. More so on the latter, should politicians follow Khan and Sturgeon in imposing rent freezes.

Download Insight as PDF

This communication is provided for information purposes only, and is not a solicitation or inducement to buy, sell, subscribe, or underwrite securities or units. Investors should seek advice from an Independent Financial Adviser or regulated stockbroker before making any investment decisions. Progressive Equity Research Ltd (“PERL”) does not make investment recommendations.

Opinions contained in this communication represent those of PERL and/or our affiliates at the time of publication and PERL does not undertake to provide updates to any opinions or views expressed. PERL does not hold any positions in the securities mentioned in this communication, however, PERL’s directors, officers, employees, contractors and affiliates may hold a position,  and/or may perform services or solicit business from, any of the companies or related securities mentioned.

Any prices quoted in our research are as at the previous day’s close.