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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October 5, 2023

UTG, GRI, INL, INLZ, FAN, GDP | Economics – Rents hits new high as 25 chase each new letting; Housebuilding pulls down Construction PMI; Cost deflation slows | News – Smoke and mirrors over post-HS2 infrastructure spend

Company news

Unite Group (UTG, 881p, £3,839m mkt cap)

Owner, manager and developer of UK student accommodation. Trading update, Q3 fund valuation, CEO succession & Board changes.

Trading: 99.7% occupancy for the 2023-24 academic year (2022-23, 97.9%).     Rental growth, 7.3% for the 2023/24 academic year (3.5%). “Rental growth from nominations agreements has exceeded direct-let tenancies [and] university partners and are willing to agree increased rental levels on single year deals and new multi-year agreements”. Property values broadly stable in Q3: USAF, +0.2% (quarterly rental growth of 1.9% and a 9 basis point increase in property yields); LSAV, -0.2% (+2.0%, 9 bp increase).

Building safety: “We have not identified any reinforced autoclaved aerated concrete (RAAC) in any our buildings. A limited number of additional surveys are ongoing but given an average age of 12 years for our portfolio, should any RAAC be found, we do not anticipate any material issues. We continue to progress with cladding remediation across the estate and will complete 15 projects during 2023. The expected cost of remediation projects in 2023 is £80m (Unite share, £41m), which was fully provided for at 31 December 2022. We expect to maintain our run-rate of 10 – 15 projects in 2024. Expected future spend is in-line with previous guidance. To date, we have successfully made claims against the original build contractors for a total of £30m (Unite share, £24m) representing 80% of the costs on those projects. This supports our view that 50 – 75% of costs will ultimately be recoverable, although no provision has been made for future recoveries in our balance sheet. While positive legal precedents are being established on a case-by-case basis, it is taking longer than anticipated to settle these disputes, meaning we anticipate a greater level of net spend in the earlier years of the remediation programme”.

Outlook: “The strong letting performance increases our confidence in delivering at least 5% rental growth for the 2024-25 sales cycle and supports our property valuations as the market adjusts to an environment of higher interest rates. The UK is increasingly short of suitable student accommodation as homes of multiple occupation (HMO) landlords continue to leave the market at pace. As the leading provider of PBSA, we have a crucial role to play and are uniquely positioned to address this supply need. We continue to work closely with universities to ensure students have access to high quality, affordable accommodation”.

Board changes: Richard Smith has decided to step down as Chief Executive with effect from 31 December after 13 years with Unite, having been CEO from 2016. He will remain as an advisor to the business until the end of September 2024 to ensure a smooth handover of responsibilities and to provide advisory support on Unite’s relationships with higher education partners and government stakeholders. Following an extensive selection process Joe Lister has been appointed Chief Executive, effective from 1 January, after 22 years with Unite, including 15 years as CFO. Michael Burt, currently Group Investment Director, will be promoted to CFO.

Grainger (GRI, 228p, £1,688m)

UK’s largest listed residential landlord. FY (Sep) results. Total LFL rental growth, 7.7% (HY 22, 6.8%); PRS LFL rental growth, 8.0% (+6.9%) of which, new lets +9.2% (+8.2%), renewals +7.2% (+6.1%): regulated tenancies +5.9% (+5.8%). Occupancy in stabilised PRS portfolio, 98.6% (98.5%). Vacant sales from regulated tenancy portfolio at prices achieved within c. 2% of September 2022 valuations.

Outlook: “We are due to complete over 1,600 new build-to-rent homes in 2023, driving a further step change in EPRA earnings and bringing our total operational portfolio to over 10,000 homes. We are delivering these new homes into one of the strongest occupational markets we have seen. Current leasing at our newly-opened schemes is exceeding underwriting and we continue to drive a step up in rental income across our national portfolio. However, we remain mindful of protecting our customers’ rental affordability and, therefore, continue to ensure that rental growth across our portfolio moves broadly in line with wage inflation”. FY results, 22 November.

Inland ZDP (INLZ, 54p, £9.8m)

Company formed to issue zero dividend shares and lend the proceeds to Inland Homes (INL, shares suspended),  for use in its property development and housebuilding business. The FCA has temporarily suspended Inland ZDP’s Zero Dividend Preference Shares from the Official List at the request of the company. “On 27 September 2023, Inland Homes announced its intention to appoint administrators. The proposed Administrators have already received expressions of interest in various assets of the Inland group.  However, until the realisation process is underway it is not possible to predict the extent of recoveries of amounts owed to ZDPCo or the timing thereof”.

Volution Group (FAN, 337p, £665m)

International designer and manufacturer of energy efficient air quality systems. FY (Jul) results. Rev +6.6%, £328m; adj PBT +6.8%, £65.1m; stat PBT +3.4%, £48.8m; adj EPS +7.5%, 25.8p; div +9.6%, 8.0p; net debt, £58.1m (FY 22, £60.8m); 0.8x EBITDA (0.9x).

Outlook: “The group’s resilience is underpinned by our strong local brands, our increasingly wide geographic end market diversity and the greater proportion of our revenue generated from the refurbishment market. The regulatory changes in our local markets continue to drive demand for our innovative and well-positioned low carbon product technologies. In addition, our three new acquisitions completed in the last six months; our ongoing focus on operational excellence; and the depth of experience and commitment across our local teams provides resilience and gives us confidence of making further progress in the year ahead”.

Great Portland Estates (GPE, 388p, £986m)

London office and retail property group. HY (Sep) trading update. Leasing – 37 new leases and renewals (including nine fully managed deals) signed in the first half generating annual rent of £11.2m (GPE share, £10.5m), with market lettings on average 13.4% ahead of March 2023 ERV. Pipeline – commitment to major office-led redevelopment at Jermyn Street Piccadilly, W1 to provide 66,600 sq ft (up from 54,700 sq ft) of new Grade A space; planning permission obtained for the redevelopment of Minerva House, SE1 and work underway to prepare the site for a potential start early next year; acquisition of freehold interests at 16/19 Soho Square, 29/43 Oxford Street and 7 Falconberg Mews, W1 for £70m (£772 psf). The group is reviewing the Planning Inspector’s report and Secretary of State’s planning refusal at New City Court, SE1.

Outlook: “We are seeing healthy demand across our range of high quality, well-located spaces, signing up customers at rents comfortably ahead of March 2023 rental values. Looking ahead, current market conditions will likely further constrain supply in a market where high quality space is extremely scarce. As customers compete to secure the next home for their business, we fully expect the gap between the best spaces and the rest to widen”. FY results, 16 November.

Economic data

Rental market. Rightmove’s Rental Price Tracker (not yet on its website) records that rents reached another new record high in Q3 with monthly bills outside London averaging £1,278, +10% Y/Y. Average advertised rents outside the capital hit the latest high after breaking records for 15 consecutive three-month periods. Average London rents have also risen to a record of £2,627 a month, up 12% on a year earlier. Each advertised rental property is receiving an average of 25 enquiries, compared to eight in the same period in 2019, pre-pandemic.

Construction activity. UK Construction output showed its steepest decline since May 2020 in September, dragged down mainly by declining housebuilding activity, based on the latest S&P Global/CIPS PMI data. The Purchasing Managers Index declined to 45.0 (50 = no change) in September from a narrowly positive 50.8 in August. Residential (38.1 from 39.6) continued to be the worst performing sector, followed by civil engineering activity (45.7 from 53.1). Commercial building declined at only a modest pace in September (47.7 from 53.0), but significant slowing after solid growth throughout the summer. However, the number of construction firms predicting a rise in output over the year ahead (41%) continued to exceed those forecasting a decline (17%), albeit the lowest net level since December 2022 amid concerns about higher borrowing costs and weaker housing market conditions. This brings the UK PMI closer to the Eurozone’s rate of decline after a long period of outperformance, separately announced today. The Eurozone as a whole was saw a slightly less negative 43.6 following 43.4 in August, with Germany plunging from 41.5 to 39.3 amid a near 14-year low in housebuilding.

Construction PMI, index

Material prices. Building materials price deflation reduced in August, reversing the recent increasingly downwards trend, according to the latest monthly building materials and components statistics from the Department for Business and Trade. The overall index for building materials prices was unchanged between July and August but the Y/Y rate recovered to -2.3% from -4.0% in July. For housebuilding materials, the annualised rate moved to +0.5% (July, -1.5%); other new construction, -3.7% (-5.0%); RMI, -2.8% (-4.3%). The data includes statistics on a wide range of domestic building materials production, deliveries and stocks and import activity. Next release, 1 November.

Viewpoint: Rather a surprise, particularly given the sharp slowdown in housebuilding highlighted in the PMI commentary and rising inventories of bricks and other materials. This could be influenced by the timing of annual pricing deals; nevertheless, the trend is likely to revert to a more deflationary path in the medium term.

Building materials price indices, y/y change (%)

In other news …

PM’s speech – Viewpoint. Given Rishi Sunak’s proposed effective lifetime cigarettes ban for 14-year olds, the smoke-and-mirrors metaphor seems apt for the PM’s claim that all of the £36bn reported cost will be reallocated to  alternative rail, road and bus schemes. Having watched for decades successive governments perform what looks to the old three cups when shifting around housing grant, infrastructure and other spending commitments, I’d suggest cynicism is in order. First, some of the ‘new’ transport schemes had already been pledged and, I suspect, budgeted for. Even for the new ones, the timing is anyone’s guess.  lists the proposals and, yes, they do tot up to £36bn. Meanwhile, Building (paywall) reports that, although the line will now go to Euston, HS2’s terminus at Euston will be delivered with just six platforms, almost half the original 11; while the rest of the gigantic crater outside the London terminus will be the site of a new Development Zone.

Metrobank. The ‘challenger’ bank’s shares sank 27% in early trading, after some newspapers reported it needed to raise up to £600m, BBC. Metro Bank, which has around 2.7 million customers, refused to comment on the figure and the urgency of the talks but said it “continues to consider how best to enhance its capital resources”. Last month regulators refused to approve a request to lower the capital requirements attached to its mortgage business, according to the BBC.

Viewpoint: A bit of an uncomfortable flashback to the days of queues outside Northern Rock 16 years ago. We’re nowhere near having the strains on mortgage lending in the run-up to the Global Financial Crisis, but worrying ‘optics’ nonetheless.

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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