Join our community of smart investors

Grainger heading deeper into the private rental sector

Over half of rental income is now generated from the private rental portfolio, and more schemes are on the way
May 25, 2017

Forget the old Grainger (GRI), the manager of a stodgy regulated-tenancy property portfolio, and say hello to a transformed operation focused on the private rental sector (PRS), currently one of the hottest parts of the housing market. With a chronic shortage of new housing, demand for rental accommodation is growing all the time, and Grainger is more than halfway towards its aim of investing £850m by 2020.

IC TIP: Buy at 261.9p
Tip style
Growth
Risk rating
Low
Timescale
Long Term
Bull points
  • Rising rental income
  • Huge reversionary surplus
  • Shares trading at a discount to NAV
  • Strong relationships with local authorities
Bear points
  • Growing competition from institutional funds
  • Modest dividend

On average, Grainger is completing a new PRS building every two months, and hopes to keep up the pace for at least the next two years. The benefits are already starting to show through. Net rental income in the six months to the end of March 2017 was up 11 per cent at £20m, with over half of this now coming from PRS assets. This helped to boost adjusted earnings by 39 per cent to £34.1m, which also reflected lower overheads and finance costs. This is the result of a good deal of self-help, including a better operating method and supply chain efficiency.

These have reduced property operating expenditure as a percentage of gross rental income from 28 per cent in the year to September 2016 to 25.8 per cent in the first half of the current year. Overheads have come down by 17 per cent to £13.4m, while finance costs have been cut by a third, thanks in part to a drop in the average cost of debt from 4.5 per cent to 3.6 per cent.

 

 

Grainger still has a £1.3bn regulated-tenancy portfolio, which provides slugs of income when properties are vacated (normally as a result of a tenant's death) and sold off. As these properties have been owned and managed by Grainger for some time, there is considerable locked-in value. Of the total estimated reversionary surplus of £314m (the difference between market value and vacant possession value), worth 75p a share, around £247m (59p) is tied up in the regulated portfolio. As well as generating cash on the sale of vacant properties - around £57m in the six months to March 2017 - Grainger has also bolstered its balance sheet and honed its focus with the sales of its equity release business and a German joint venture last year.

GRAINGER (GRI)
ORD PRICE:261.9pMARKET VALUE:£1.09bn
TOUCH:261.6-261.9p12-MONTH HIGH:267pLOW: 193p
FORWARD DIVIDEND YIELD:2.1%TRADING STOCK:£879m
DISCOUNT TO FORWARD NAV:16%NET DEBT:112%
INVESTMENT PROPERTIES:£492m

Year to 30 SepNet asset value (p)Net operating income (£m)Earnings per share (p)Dividend per share (p)
20142551404.72.5
20152731385.52.8
2016273599.62.8
2017*3035511.84.9
2018*3126112.05.5
% change+3+10+2+12

Normal market size: 5,000

Matched bargain trading

Beta: 0.41

*Peel Hunt forecasts, adjusted NAV and EPS

Grainger also works alongside local authorities, and is currently progressing with a venture with the Royal Borough of Kensington & Chelsea on a mixture of private and social housing. The council provides the land, while Grainger incurs the build cost and in return earns a management fee and a share of future rental income. These relationships are extremely important because, encouraged by the government's latest white paper on housing, there is a wall of institutional money heading into the PRS sector. So Grainger's well established relationships and expertise will prove vital.

PRS schemes currently under construction include a 614-unit scheme in Salford, expected to complete late in 2018, and a 104 homes development at Berewood in Hampshire. The dividend is currently modest, but will increase because Grainger proposes to distribute half of all rental income, and broker Peel Hunt expects a yield of over 4 per cent by 2020.