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The UK housing market is causing unease among individuals. According to Nationwide, prices have dropped 3.5% in the past year. Homebuilders are responding to this cooling market by engaging in bulk sales.
Last Friday, Barratt Developments announced plans to sell 604 homes to Citra Living, a rental division of Lloyds Banking, for £168mn. Similarly, MJ Gleeson is selling 288 homes to the investment group Carlyle for £50mn.
Given the decline in homebuyer sales, bulk sales present an opportunity for homebuilders to capitalize on the demand for rental properties. While this news may reassure shareholders, it indicates a challenging summer ahead for the sector. The unexpected rise in inflation has already impacted rate expectations, leading to declining confidence in the market since the end of May.
It is projected that Barratt will sell 1,000 fewer private homes this year and a further 1,500 fewer in 2024, according to a Visible Alpha consensus. Earnings per share expectations have also dropped by approximately 50% over the past year, aligning with the broader sector.
The UK market fundamentals support this trend, as there is a shortage of homes for a rapidly growing population. However, increasing financing costs will continue to hinder sales. Investors may want to shift their focus to the expanding UK private rental sector. Higher interest rates can boost rental demand by discouraging potential buyers.
Grainger, the largest-listed residential landlord, reported a record occupancy rate of 99% in the six months leading up to March. Rents have grown at an annual rate of 7%. Since the beginning of 2022, its shares have outperformed those of housebuilders by 30%.
Grainger’s portfolio value has only declined by 1% from its recent peak. Financing terms suggest further decreases are imminent. Barclays notes that the current property yield of approximately 4% is still below the marginal borrowing cost, predicting a further 50 basis points increase in yields over the next two years.
Despite potential tremors in the housing market, Grainger possesses minimal debt and a strong build-to-rent pipeline, which should support its earnings.
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