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.

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March 20, 2024

PRSR, ECEL | Economics – House prices rise M/M in January as inflation falls below forecast, ONS; Rents rise but facing affordability ceiling, Zoopla

Company news

The PRS REIT (PRSR, 76p, £419m)

Real estate investment trust investing in private rental sector (PRS) family homes. FY (Dec) results. Rev +16%, £28.1m (net rental income +17%, £22.9m); stat PBT +106%, £30.3m; adj earnings (exc fair value adjustments) +11%, £18.7m (“in line with management expectations”); EPRA EPS +13%, 1.8p; HY div unch, 2.0p (“total dividend target for FY 24 remains 4.0p”); EPRA TNAV +3%, 124p; net debt, £401m (HY 23, £355m); EPRA LTV, 37.1% (35.6%).

Trading: “Housing delivery is in its final stages for the current portfolio, with 184 new homes added to the portfolio in H1 (127). This included the acquisition of a fully completed and let development site of 52 homes. A further 312 homes were under way at 31 December (613)”. Total portfolio at 31 December,  5,264 completed homes with an ERV of £60.3m pa. LFL rental growth, 11.1% (5.7%); ave yield on assets in the portfolio, 4.5% (4.3%).

Outlook: “Rental demand for high-quality family homes remains very strong nationally and is expected to grow against a background of structural under supply, higher interest rates and continued cost-of-living pressures. We operate in a very robust segment of the property rental market – single family rental – and macro factors remain very supportive of the business. We have built a portfolio of high-quality homes that are affordable for ordinary families across the country and remain very confident of ongoing prospects for the PRS REIT.

Eurocell (ECEL, 115p, £126m)

UK retailer and manufacturer, recycler of PVC windows and doors. HY (Dec) results. Rev -4%, £365m; adj PBT -13%, £15.2m (“in line with expectations, despite further market deterioration in the second half”); stat PBT -14%, £11.7m; adj EPS -10%, 11.0p; divs -5.2%, 5.5p; net cash, £0.4m (FY 22, net debt, £14.4m).

Trading: “Sales down against a strong 2022 comparative period, with volume 6% lower, including Profiles -4%, reduced RMI and significantly weaker new build activity, partially offset by benefit of market share gains”. Building Plastics -4%: RMI volumes in branches -5% Y/Y. Increased competition for limited demand leading to pressure on margins in the branch network. Continued input cost inflation, offset with selling price increases where possible; some easing on input cost pricing through the second half of the year. Early and decisive action taken on operating costs in response to lower volumes: Q4 22 restructuring reduced operating costs by £5m pa from the start of 2023; further headcount reduction in Q2 23 to deliver savings of c. £2m in H2 and c.£4m pa thereafter, with £2.7m redundancy costs included as a non-underlying item.

Outlook: “We took early and decisive action on costs and have continued to focus on efficient working capital management. Whilst the near-term outlook for our markets remains challenging, these actions leave us well placed to benefit from a market recovery when it comes. Looking ahead, we have identified a clear pathway to building a £500m revenue business, generating a 10% operating margin over a five-year period, built around four pillars; Customer Growth, Business Effectiveness, People First and ESG Leadership. This is an ambitious vision, but when we aggregate the growth opportunities, and apply a degree of sensitivity, we believe it is an achievable target, with the potential to create significant shareholder value”.


Economic data

House prices, inflation. UK house prices rose by 0.5% M/M, seasonally-adjusted, in January, reducing the non-seasonally adjusted Y/Y rate to -0.6%, from -2.2% (revised from -1.4%) in January, according to the latest data from the ONS (below, left). The average UK house price was £282k. Regions: England -1.5% Y/Y, £299k; Wales -0.8%, £213k; Scotland +4.8%, £190k; Northern Ireland +1.4%, £178k. Of English regions, the highest growth was North West, +1.0%; London, -3.9%. The house price data followed the earlier inflation announcement this morning that CPI had fallen to 3.4% Y/Y in February from 4.0% in January, the lowest level for almost two and a half years, and undercutting economists’ forecasts of 3.5 – 3.6% (below, right). On a monthly basis, CPI rose by 0.6% in February 2024, compared with +1.1% in February 2023. Core CPI (excluding energy, food, alcohol and tobacco and which is a key measure in the Bank of England’s rate setting decisions) rose by 4.5% in the 12 months to February 2024, down from +5.1% in January. Next house price and inflation releases, 17 April.

Viewpoint: The greater than expected fall in inflation comes ahead of tomorrow’s BoE meeting, at midday, which is expected to leave rates unchanged. According to The Times, ahead of today’s figures financial markets were pricing in around three cuts this year, starting in June.

Houseprices and CPI

Rental market. Residential rents continued to rise significantly in Q1, a Y/Y increase of 7.8%, but at a two-year low as affordability constraints started to attract would-be tenants back into the sales market, according to the latest UK Rental Market Report from Zoopla. The average UK rent is £1,223 per month, £2,121 in London and £995 in the rest of the country. Scotland remains area with fastest annual rental growth at 11.6%. Over half of private rented homes are in £1,000+ per month markets. Demand, however, has fallen by 20% Y/Y as one-off pandemic factors ease and the labour market cools, according to the property portal; meanwhile a fifth more homes are available for rent than a year ago but current supply still below pre-pandemic average. Rental affordability hit another decade high both outside the capital, 24.1% of 1.25x average earnings (23.1% in December), with London at 41.8% (from 40.2%). This, with recent falls in mortgage costs, is pulling some households back to the sales market, but Zoopla predicts that affordability ratios will get more stretched during 2024 (below, based on UK including London).  Expansion in rental supply is the main route to better affordability, the report concludes.

Rental unaffordability
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