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A high-yielding, low-risk build-to-rent play

A developer specialising in purpose-built student accommodation and build-to-rent housing has a record development pipeline and is benefiting from robust institutional demand for both asset classes.
A high-yielding, low-risk build-to-rent play
  • 12 per cent rise in annual adjusted pre-tax profit to £51.1m slightly ahead of expectations
  • Net cash of £125m, up from £95m in September 2020
  • Record residential for rent development pipelines

Watkin Jones (WJG:261p), a developer specialising in purpose-built student accommodation (PBSA) and build-to-rent (BTR) housing, not only exceeded analysts’ earnings forecasts, but a bumper £1.75bn development pipeline and strong institutional demand for both assets classes underpins a ramp up in profits in the coming years.

Analyst Alastair Stewart at Progressive Equity Research expects revenue to rise 28 per cent to £550m in the current financial year and by a further 20 per cent to £659m in 2023. On this basis, expect pre-tax profit to increase to £55m and £75m, respectively, to deliver earnings per share of 17.4p and 22.8p.

Moreover, with net cash equating to a fifth of the group’s market capitalisation, and the capital-light business model funded by institutional investors who acquire developments on a forward-sale basis, the excess cash is being recycled back to shareholders. Having just hiked the payout by 12 per cent to 8.2p a share, Stewart expects the board to declare dividends of 8.7p and 11.5p, respectively, in the 2022 and 2023 financial years, based on two times dividend cover.

Such is the strength of the forward pipeline that 90 per cent of the BTR schemes due for completion over the next two years have already been forward sold, as well as two-thirds of the PBSA developments. There are strong demand drivers in each segment, which underpins future land sales, too.

In BTR, a supply-demand imbalance in the housing market, coupled with urbanisation and lifestyle changes amongst the young, who continue to delay marriage and having children, are highly supportive of demand. These factors are not lost on institutions attracted by the high level of income security and potential for capital growth in what remains a fragmented and undersupplied market.

In fact, CBRE estimates total investment in the asset class hit a record £4.2bn in 2021 with almost £2bn of deals under offer at the year-end. Chief executive Richard Simpson notes volumes are expected to rise by 20 per cent this year and next, buoyed by “record levels of liquidity”. Similar dynamics are at play in the PBSA market, where a record number of 18-year-olds (41.5 per cent of the total) applied for a place at a UK university in the last intake, but only 20,000 new beds were added to supply. Increased demand for student places from non-EU countries is accentuating the supply-demand imbalance given that students from China and the US are twice as likely to live in PBSA as UK students.

The shares got within a penny of my 275p target price at the start of the year, having risen from 236p when I covered the interim results (‘Opportunities in property’, IC, 26 May 2021). Trading on a 2023 forward price/earnings (PE) ratio of 11.5 and offering a prospective dividend yield of 4.4 per cent, I see decent upside to my raised target of 300p. Buy.


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