Housing market ‘still on track for ‘soft landing’ – Zoopla | UTG, INL, TPK, DLN

Company research

Unite Group (UTG, 985p, £3,943m mkt cap)

Owner, manager and developer of UK student accommodation. FY (Dec) results. Rental income +20%, £340m; adj earnings, +48%, £163m; adj EPS +48%, 40.9p; IFRS EPS +3%, 88.9p; div +48%, 32.7p; EPRA TNAV, 927p (FY 21, 882p); see-though net debt, £1,734m (£1,522m); LTV, 31% (29%).

Trading: Occupancy, (2021-22, 94%; , 2020-21, 88%), “reflecting strong student demand and significantly less disruption from Covid-19 than the previous two academic years”. Across the groups entire property portfolio, 83% of rooms are now sold for the 2023/24 academic year, significantly ahead of the prior year as well as pre-pandemic levels (2022-23, 67%).

Outlook: “We see strong demand for student accommodation, which is reflected in our excellent progress with reservations for the 2023/24 academic year. In our strongest markets, we have seen an increasing number of students looking to secure accommodation earlier in the sales cycle than previous years. This early customer interest reflects the appeal of our all-inclusive, fixed-price offer and lower availability in the houses in multiple occupation (HMO) sector as some landlords choose to leave the market in response to rising costs and increasing regulation. We have also seen increased demand from universities, following more cautious behaviour during the pandemic. As a result of this strong demand and the need to offset cost pressures in our business, we now expect to deliver rental growth of 6-7% for 2023-24 (previously at least 5%)”.

Inland Homes (INL, 10.8p, £24m)

Leading brownfield developer, housebuilders and partnership housing group, focused on South and South East. Delay of FY results. “On 3 August, the Group announced the appointment of PricewaterhouseCoopers LLP as its new auditors with immediate effect, for the Group’s financial year ended 30 September 2022, following the completion of a formal tender process. The Group and PricewaterhouseCoopers LLP have agreed they both require additional time to finalise and complete the accounts and related audit procedures.   The Group’s preliminary results for the financial year ended 30 September 2022 will now be released during March 2023. The Board expects to report full year results and IFRS net asset value in line with the trading update provided on 25 January 2023”.

Travis Perkins (TPK, 1,046p, £2,223m)

Leading UK builders’ merchant and owner of Toolstation. FY (Dec) results. Rev +8.9%, £4,995m; adj op profit exc property -6.3%, £285m; EPS -12.6%, 90.8p; div +2.6%, 39.0p; net debt/EBITDA, 1.8x (FY 21, 1.2x).

Trading: “Solid performance in the General Merchant division, with further market share gains, driven by focus on enhancement of digital capability and expansion of value-added services primarily across Hire, Benchmarx kitchens and Managed Services. Continued strong performance from the group’s specialist distributors – BSS, Keyline and CCF. Staircraft now integrated and enhancing the Group’s housebuilder proposition. Toolstation returned to good growth in H2 after tough prior year comparatives in H1. Significant investment in expanding infrastructure across both the UK and Europe. Elevated levels of materials cost inflation diligently managed. Cost actions to deliver savings of around £25m in 2023”.

Outlook: “Management continues to anticipate delivering a performance in line with market expectations … and, in line with industry forecasts, is planning for a decline in overall market volumes in the mid to high single digit range in 2023. This will vary across end markets with private domestic new-build and RMI more challenged while the commercial, industrial and public sectors are expected to remain more resilient. Product cost inflation is expected to moderate into 2023 although management does not currently expect to see any notable deflation in manufactured products [and] therefore expects to see mid to high single digit percentage product cost inflation overall driven by the rollover of prior year increases and further new increases already announced so far this year”.

ESG: “Positive progress towards sustainability targets, notably a 34% reduction in Scope 1 & 2 carbon emissions during the year”.

Derwent London (DLN, 2,592p, £2,911m)

Real estate investment trust owning commercial portfolio predominantly in central London. FY (Dec) results. Net rental income +6.0%, £189m; EPRA TNAV -8.3%, 3,632p; IFRS loss before tax, £280m (FY 21 PBT, £253m; EPRA EPS -1.8%, 107p; div +2.6%, 79p; net debt, £1,257m (£1,252m).

Trading: Portfolio estimated rental value (ERV) +1.3%; total property return, -3.4%, “outperforming benchmark of -8.0%”. £133m of property acquisitions and £122m of capital expenditure; £206m of disposals, £25.6m above December 2021 book value; further £53.6m sold in 2023. EPRA vacancy increased to 6.4% from 1.6% in December 2021; reduces to 5.0% for 2023 lettings to date.

Outlook: “We expect ERV growth across our portfolio in 2023 of +0 – 3%, with our higher quality properties continuing to outperform. We anticipate rental growth accelerating for the best buildings over the medium-term, particularly in the West End. The ongoing weight of global capital looking to invest in London, combined with the recent reduction in volatility across financial markets, is encouraging. This is supported by London’s attractive yield relative to other European cities. Upward pressure on yields is easing and we expect our portfolio to be more resilient than the wider London office market”.

Economic data

House prices slipped by 0.15% between January and February, against a background of modest but rising discounts to asking prices, according to today’s UK House Price Index from Zoopla. The average price across the UK was £260.8k, a 5.3% Y/Y increase, down from +8.6% in January. Sellers are now accepting average discounts of 4.5% – up from “3 – 4%” estimate in the property portal’s January report and down from an average 3.5% pre-pandemic, in 2019 (see below) “as a buyers’ market takes hold”. This equates to an average discount to asking price of £14,000 – a third of their post-pandemic house price gains. Demand from home buyers has rebounded in the first two months of 2023 but remains at half the level recorded a year ago. New sales volumes in early 2023 have also recovered, tracking the usual seasonal upturn, albeit 24% lower than this time last year. “The reality is that current market conditions are more aligned with the pre-pandemic years with demand 8% higher and sales agreed up 1%”. However, Zoopla continues to argue that “the market is still on track for a soft landing with modest price falls of up to 5% and 1.0m sales in 2023”.