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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December 13, 2023

SPR, FAN | Economics – Downpours drag down construction output; Rental growth to halve in 2024, Zoopla | News – City planners urge refurb over newbuild; Government cools on offsite construction

Company research

Springfield Properties (SPR, 74p, £88m mkt cap) – SPR is a client of PERL

Scotland’s only quoted housebuilder. HY (Nov) trading update.

Guidance:Trading in H1 2024 has been in line with management expectations. [We are] confident of meeting market expectations for FY 2024”. Link to Progressive Equity Research note, Profitability and debt reduction on track:

“Springfield has confirmed in its first-half trading update that it is ‘confident of meeting market expectations’ for profitability and debt reduction for the full year to May. We retain our FY24E PBT estimate and introduce forecasts for FY25E that show 26% growth in adjusted PBT and a further substantial decline in debt. We expect the Group’s recovery prospects will be supported by shortages of housing across all tenures and the major economic stimulus from the newly created Highlands freeport.”

Company news

Volution Group (FAN, 399p, £788m)

International designer and manufacturer of energy efficient air quality systems. AGM.

Guidance: “Whilst new build market conditions remain challenging, our refurbishment activities continue to benefit from strong regulatory drivers and consumer focus on eliminating the damaging health impacts of mould and condensation in buildings. Our strong start to the financial year, together with the tailwind from the three acquisitions completed in the calendar year, gives the Board confidence in delivering earnings ahead of the current range of market expectations for the financial year”.

Trading: First four months ended Nov. Rev +8.0%, c. £121m (organic, +2.9%; forex impact, -2.6%). “All three geographic regions grew earnings with the strongest performance coming from our UK residential activities. Both public and private refurbishment in the UK has been supported by greater customer awareness of indoor air quality, and resolution of mould and condensation issues. Across the Group over two-thirds of revenue is derived from the refurbishment market.  Similar energy efficiency supportive trends have assisted us in other markets, notably decentralised heat recovery in the Netherlands and the move toward low energy ceiling fans in Australia. Where our exposure is more weighted towards new build activity, notably in Germany and in our OEM activity, we have experienced weaker performance as higher interest and mortgage rates have led to subdued demand. Gross and operating profit margins have improved compared to FY23 due to strong pricing discipline, an ongoing focus on our operational excellence programme, including material value engineering initiatives, and the introduction of new products. Our recent acquisitions in France, Slovenia and New Zealand are progressing well”.

Economic data

Construction output Declined by 0.3% in the three months to October, seasonally adjusted, due to a 2.0% fall in new work, while repair and maintenance increased by 2.2%, according to the ONS. Monthly construction output is estimated to have decreased 0.5% in volume terms in October following an increase of 0.4% in September. The decrease in monthly output came solely from a 1.7% decrease in new work, partially offset by a 1.3% increase in repair and maintenance. Three out of the nine construction sectors registered a fall in October, with the main contributors to the monthly decrease seen in private new housing and private commercial new work, which decreased 5.2% and 1.2%, respectively. According to the ONS, anecdotal evidence suggested that heavy rainfall and strong winds led to delays in planned work in October – one of the wettest on record; a high number of comments from businesses specifically noted the negative effect of storms.

Lettings market. Annual rental growth is set to continue into 2024 but at half the rate, to 5%, as the longstanding imbalance between demand and supply matches up against affordability limits, according to the latest quarterly UK Rental Market Report from Zoopla. London will lead the slowdown with rents expected to increase by just 2% over 2024 as affordability pressures impact demand. (London has c, 30% of overall rental supply, so has a disproportionate weighting on the overall average.) Rental growth of 5 – 8% is expected in regional markets.  Demand is weakening slowly off a high base, -11% Y/Y, but still a third higher than the five-year average; in London it is -20% but still above the average. There is evidence of growing resistance to higher rents, especially in the capital, where affordability is most constrained: the average renter household of 1.25 people spends 40.2% of earnings on rent compared to a UK average of 28.4%. The volume of asking rent reductions of over 5% is currently the highest in London with 10% of rental listings in November impacted. Meanwhile, the proportion across the rest of the UK has also jumped to 7%. Nevertheless, the slowdown in overall rental growth over 2024 will be kept in check by an ongoing scarcity of supply brought about by low new investment in the face of more regulation and higher mortgage rates. The latest quarterly data from Zoopla shows annual rental growth in new lets slowing to 9.7%, from 11.9% a year earlier: London’s growth slowed from +17.1% to +9.1%; UK ex-London rose from +9.7% to +10.0%. Once again, Scotland was the fastest growing region, +12.9%, from +11.4%, impacted by the Scottish Government rent controls, which apply to existing rather than new lets. Northern Ireland was the slowest, +3.2%, from +7.7%.

Annual rental growth to slow over 2024

In other news …

New build vs retrofit. Planners at the City of London Corporation has set out proposals to force developers to seriously consider retrofit and reuse as first options for planned redevelopment of buildings in the Square Mile, The Corporation’s new Sustainability Supplementary Planning Document also sets out forceful guidance on controlling carbon emissions, flexible building design and further greening schemes as part of the Corporation’s net zero plan for the whole Square Mile by 2040. Meanwhile, The City of London approved a record number of retrofitting planning applications in the Square Mile in 2023 as landlords prioritise more sustainable, grade-A offices, Property Week (paywall). A total of 17 major retrofit planning applications were approved in the City this year to date, accounting for half the retrofitting planning applications across London.

Viewpoint: Retrofit ‘ticks all the right boxes’, and was supported by Levelling-up Secretary Michael Gove, who contentiously ruled out the rebuild of M&S’s flagship Oxford Street store in neighbouring Westminster – against the consent by its council. However, decades of experience suggests refurbishment can uncover a Pandora’s Box of unexpected technical – and uncosted – challenges. In a parallel development, it’s telling that the Government – an erstwhile obsessive advocate of Modern Methods of Construction (MMC) – appears to be cooling on volumetric housebuilding and other offsite production: Housing Minister Lee has warned that the Government “can’t subsidise MMC forever”, Building (paywall). Speaking to a House of Lords select committee, he said that aspirations around the approach – which were mooted at increasing speed and cutting cost and waste – had “not yet” achieved, but that it is “proportionate” for it to continue investing for a “reasonable timeframe”. He said “the process hasn’t been the smoothest” due to relatively changeable economic circumstances, which has seen MMC housebuilders such as Ilke Homes and House by Urban Splash go into administration.

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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