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.

October 31, 2023

CREI | Economics – House price falls lower than expected but volumes remain depressed, Zoopla

Company news

Custodian Property Income REIT (CREI, 81p, £358m)

UK commercial real estate investment trust. Q2 (Sep) trading update. 1.375p dividend approved for Q2, fully covered by EPRA earnings, and in line with target of no less than 5.5p for the year ending 31 March 2024. EPRA EPS, 1.4p (Q1, 1.5p). ERV +0.7% since 30 June 2023; portfolio ERV (£49.7m) now exceeds passing rent (£43.2m) by 15%. Occupancy, 91% (Jun 23, 90%). NAV, 95.9p (Jun 23, 98.6p); portfolio valuation -1.8%, £610m. LTV 29.6% (28.0%).

Outlook: “The disconnect between the occupational and investment markets in UK real estate continues to persist.  While the impacts of high inflation and interest rates appear to weigh heavily on investor sentiment.  However, since the start of 2023 valuations have been reasonably stable across the market. It is the strength of the occupational market driving rental growth and low vacancy that will ultimately support fully covered dividends and earnings growth.  Income/earnings remain a central focus for Custodian, and it is income that will deliver positive total returns for shareholders.  On this basis we remain cautiously optimistic”.

Economic data

Housing market. House prices have fallen by a relatively modest 1.1% over the past 12 months and are forecast to decline by 2% in 2024, with transaction volumes 20% below the long-term average at 1 million, according to analysis by Zoopla. House price inflation has slowed from 9.6% to -1.1% over the past year, Zoopla’s latest UK House Price Index records, with four in five regional markets registering small annual price falls. The biggest fall is in the East of England (-2.4%), closely followed by rest of southern England; the Midlands, northern half of England and Wales are all below 1%; with only Scotland (+1.2%) and Northern Ireland (+1.1%) registering increases. But it is buyer demand rather than pricing that has suffered, falling by 17% Y/Y and by 23% vs the five-year average. The 1 million transactions estimate for 2023 is exactly the number Zoopla predicted in February, but the price fall so far is more modest than the “soft landing with price falls of up to 5%” made in the same report. The main reason has been the lack of forced sellers, partly due to banks’ support but mainly due to tougher lending tests, required since 2015, under which buyers had to prove they could afford 7% rates, while banks are now stress testing to 8 – 9%. The overall decline in transactions have been mitigated by cash buyers, which now make up 32% of transactions vs 20% over the past five years. (First time buyers with mortgages appear remarkably resilient, at 33% vs a 35% average; mortgaged buy-to-let is now only 6% vs 9%). Looking to 2024, lack of affordability will still constrain prices and volumes but, beyond that, earnings growth and modest declines in interest rates offers scope for a rebound in activity levels.

UK residential transactions on track for 1 million in 2024

In other news …

Residential development. Leading Japanese developer Daiwa House has formed a JV with Australian group Lendlease to build 259 homes at the Elephant and Castle regeneration site in London, Lendlease will develop and construct the new homes, which have an end value of £250m and retain a 25 per cent interest in the project, which will be the final stage of residential development at Elephant Park. Both firms previously partnered on the delivery of a 41-storey mixed use building in Manhattan, and recently began work on a build-to-rent apartment development in Melbourne.

Prices are as at the previous day’s close. Where quoted, net debt is pre-IFRS16 (excluding leases) unless otherwise stated.

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