UK Edition
Questor share tip: bet on Grainger as buy-to-let crackdown begins
Grainger
£2.26 (+1p)
Questor says BUY
Buy-to-let investing has been dealt a blow with higher rates of stamp duty kicking in amid a wider crackdown on the potential property market “bubble”.
From today, anyone buying residential property to rent pays a 3pc surcharge on top of existing duty.
However, Grainger [LON:GRI], Britain’s biggest listed residential landlord, is well positioned to exploit the private rented sector despite the tax changes.
The Newcastle-based owner of £2.8bn worth of UK property is investing heavily in its home market, amid predictions that private renters will outnumber homeowners within a decade.
Grainger, which last year posted revenues of £244m and pre-tax profits of £50m, is seeking to capitalise on the rapid growth of “generation rent” as lending has become stricter amid a shortage of affordable housing. For many younger people, renting is expected to become the norm well into adulthood.
The FTSE 250-listed company recently unveiled plans to spend £850m building and buying UK rental properties over four years.
The strategy to simplify Grainger’s business is spearheaded by new chief executive Helen Gordon, who previously led moves by RBS to deleverage its distressed property book.
Grainger has begun by selling off assets to fund new-build rental homes. It sold its British equity release arm to private equity for £325m in January, followed by the sale of a £94m loss-making German property portfolio.
It means that despite an expected plunge in revenues next year, as its business shrinks, pre-tax profits are expected to increase by 8pc to £54m in the 12 months to October 2016.
Following recent falls in Grainger’s share price, the company is trading at a 22pc discount to its net asset value, suggesting that current prices have yet to reflect its promising new strategy.
The plans were set in motion last month with the acquisition of a £99m, 614-home development in Salford, Clippers Quay, which will be completed this year. The company has also submitted plans for a 232-home development in west Berkshire.
And while private landlords are braced for new tax changes, Grainger is positioned to benefit from a Government-backed incentive to build rental homes. The build-to-rent initiative, in place since 2012, issues companies a loan covering 50pc of the costs of a new development.
But the changeability of house prices is almost impossible to predict. Questor is cautious about property shares due to a cocktail of risks over “Brexit”, the property market’s dependence on foreign buyers and currency devaluations. An eye-watering £4bn has been wiped from FTSE 350 real estate investment trusts since the start of the year.
Grainger has a significant portfolio of regulated tenancies, which they sell on at a profit after a tenant leaves or dies, having bought them at a discount – with about 4,000 homes in total. It sold £39m of these vacant properties in the four months to January 31, a 4pc increase on the year before.
But Grainger, which invests at the low end of the market, could be sheltered from the worst effects of a housing slump as it focuses future business on generating rental income rather than selling off properties.
The stock has lost 4pc in six months amid a broader slowdown. Despite the mixed picture, Questor is optimistic about Grainger’s prospects, with its discounted shares likely to drive a higher return and dividend yield. Buy.
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