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The UK housing market makes people nervous. Prices have fallen 3.5 per cent in a year, says Nationwide. Homebuilders are embracing bulk deals in another sign of the cool down.
Barratt Developments on Friday announced plans to unload 604 homes to Citra Living, a rental division of Lloyds Banking for £168mn. MJ Gleeson is selling 288 homes to investment group Carlyle for £50mn.
With sales to homebuyers drying up, bulk sales are a handy way for homebuilders to capitalise on demand for rental properties. The news will reassure shareholders. But a rough summer seems inevitable for the sector. Higher than expected inflation has already pushed out rate expectations. Share prices have tracked falling confidence since end-May.
Barratt should sell 1,000 fewer private homes this year and a further 1,500 less in 2024, according to a Visible Alpha consensus. Earnings per share expectations have fallen by about half over the past year, in line with the broader sector.
UK market fundamentals are supportive, with too few homes for a fast-growing population. But rising financing costs will continue to impede sales. Investors may want to consider the growing UK private rental sector instead. Higher rates will buoy rental demand by discouraging some potential buyers.
Largest-listed residential landlord Grainger reported record occupancy of 99 per cent in the six months to March. Like-for-like rents grew at 7 per cent a year. Its shares have outperformed housebuilders to the tune of 30 per cent since the start of 2022.
The value of Grainger’s portfolio has fallen only 1 per cent from the recent peak. Financing terms suggest further falls to come. A property yield of about 4 per cent is still below the marginal borrowing cost, says Barclays. It sees yields rising by a further 50 basis points in the next two years.
But with little debt and a strong build-to-rent pipeline, those should support earnings even as tremors rumble through the housing market.
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