LSL | Economic research – Build-to-rent investment surged in Q4, Savills
LSL Property Services (LSL, 265p, £276m mkt cap)
Estate, lettings and property/financial services agent. FY (Dec) trading update.
Guidance: “Following a positive final quarter, full year results for 2023 are in line with the Board’s expectations, and at this early stage we remain comfortable with delivering profits in 2024 materially ahead of 2023”. Revenue from continuing operations (adjusted for conversion to franchising model) -34%, £144m; after adjusting for disposals, LFL -10% “in a housing market 19% lower and in a smaller lending market”. Net cash, £34.9m (FY 22, £40.1m), “providing flexibility for future deployment of capital”.
Trading: U-lying operating profit in the second half “showed a material improvement on H1. As expected, subdued activity levels across the valuations market continued to impact our Surveying division. However, there were some signs of improvement in the final months of the year which will support our expectation of improved Surveying earnings in 2024”. Performance in Financial Services “remained resilient with profitability slightly ahead of plan”. Share of the UK purchase and remortgage market increased to 10.7% (FY 22, 10.5%). “Following the conversion of our Estate Agency network to a wholly franchise model during H1, the division continues to perform ahead of plan for revenue and profits, with second half operating margin of c. 30%”. Contract to supply surveying and valuation services to Lloyds Banking Group, originally awarded in May 2018, was extended in January to September 2028.
Build-to-rent. Total investment into the BTR sector in 2023 totalled £4.5bn, only 2% below the record level in 2022, despite of the macroeconomic challenges weighing across the wider real estate sector, according to the UK Build to Rent Market Update – Q4 2023 report from Savills. This was supported by a strong Q4, almost offsetting weak levels in Q1 and 3 (see below). It also reflected a major increase in single family housing, £1.9bn from £360m in 2022, representing 42% of the total BtR investment, up from the previous record of 8% in 2022 – explained by elevated mortgage rates and the end of Help to Buy curtailing the private for-sale market. The majority, 81%, of deals in 2023 were to fund the construction of over 12,000 new homes, totalling over £3.7bn worth of investment, compared to 19% of deals for the purchase of standing assets worth £850m, partially due to the lack of operational institutional-grade schemes to purchase. Reduced tax relief on mortgage interest, additional stamp duty for landlords and the increase in mortgage rates, could put off potential new investors and force existing landlords to rethink their portfolios or exit the sector, worsening the imbalance between supply and demand, according to the report, which also looks in detail at financial drivers, regional trends and development. It concludes that demand for rental properties high will remain high over the next decade: “The BTR sector has been able to capitalise on a continued supply and demand imbalance and high levels of rental growth. This has led to inflation-matching returns, while yields have proven comparatively resilient. The number of investors and house builders in the space is expected to grow further, with appetite to substantially expand portfolios and partnerships as confidence grows”.
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.