US private equity swooping on undervalued UK building companies

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With U.K. house prices soaring during the pandemic, share prices in the markets were hit and have remained largely depressed due to reduced profits. It was a signal to US investors who saw two quoted UK building companies with exceptional prospects trading at low valuations – perhaps too tempting to resist.

The US funds are simply doing what they do best, snapping up bargains when prices are low, when future prospects are good, and then selling on a high.

According to the Wall Street Journal, UK home sales prices last month were 13.4% higher than they were in June 2020, a figure sourced from the House Price Index published by the Nationwide Building Society, one of Britain’s biggest mortgage lenders. It’s the strongest annual house price growth since 2004. It means the average house price is now almost £250,000.

NAEA Propertymark says there is a severe shortage of housing stock for sale, meaning that there are currently 16 potential home buyers for every property on the market.

In January the Lone Star Real Estate Fund, of Dallas, Texas, acquired the well established retirement home builder McCarthy and Stone for £647 million, or £1.20 a share. The company’s shares had previously been trading above £1.50 just before the pandemic hit.

And since then the Blackstone Group Inc., another mega US fund specialising in real estate, is in the process of finalizing a deal to buy St. Modwen Properties PLC, a FTSE 250 constituent house builder and logistics company. The price agreed is £1.25 billion.

According to St. Modwen’s latest annual report, the house builder, which also rents commercial property, made a pre-tax loss of £139m in 2020, down from a £59m pre-tax profit in the previous year.

Raul Cimesa, head of London new homes at real-estate agent Knight Frank told the WSJ:

“The [UK] real-estate market just goes on growing and growing.”

Despite property prices rising inexorably, many UK home builders have seen their share prices decline during the pandemic. Construction sites and estate agents had to close during the first lockdown, and have only opened up slowly since.

Ben Babington of Trilogy Land & New Homes told the Journal that these U.S. investment firms are taking advantage of the large discount these companies are trading at and what they see as the disconnect between this and their real value. They are targeting the home sales market in London’s suburbs and regional towns and cities, he says.

“I am sure investors are seeing really good value in investing in housing at the moment. Share prices have taken a bit of a battering during the crisis,” Babington said.

James Seppala, head of Blackstone Real Estate Europe, has said that St. Modwen will be given “significant additional capital” to expand its output, mainly in the family homes market in and around regional towns and cities.

St. Modwen is a company that owns a property portfolio valued at some £1.37 billion and sold 948 homes in 2020. But the couple of months of closure in 2020 during the spring lockdown lost the company a significant amount of its production for the year, while it’s rental income also took a hit, throwing it into a pre-tax loss at the financial year end last November.

Also helping these US investors is the weakness of Sterling. At less than $1.40 to the pound, the currency is well below what it was just five years ago, at around $1.80 to $1.90.

Real-estate agents, Savills, forecasts show that prices are set to keep on growing albeit perhaps at a slower pace than now once the Stamp Duty holiday finally comes to an end in September. The firm expects prices will grow by 21.1% between now and 2025.

Other US investors have either invested in UK already or are eyeing prospects. US property investors are also interested in the UK rental market in the form of large managed apartment blocks.

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MP says landlords, tenants and government must ‘shoulder cost’ of rent arrears

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Conservative MP Nigel Mills has suggested that the burden of shouldering spiralling rent debt should be shared three ways between tenants, landlords and the government.

A member of the Work and Pensions Committee, Mills (pictured main image, bottom right) believes tenants can’t be expected to clear their debts without help, which would end up with them being evicted, losing their deposit and struggling to get another tenancy. Instead, landlords could agree to waive a third of the arrears, tenants would pay back a third and the tax payer would pay a third.

“The government should step in and say it’s nobody’s fault,” says Mills. “Tenants will need to pay some of their debt, but in return a landlord could offer a new one-year lease so the tenancy can be sustained and the arrears could be cleared over a decent period, in return for a taxpayer contribution. Those proportions could be moved up or down but that seems to be a realistic model.”

He made the suggestion while taking part in an NRLA webinar on tackling Covid-related rent arrears along with Yvonne Fovargue, Labour chair of the All-Party Group for Debt and Personal Finance, and Chris Norris, policy director at the National Residential Landlords Association.

Arrears triple

Government data shows that in England, since the start of lockdown measures last March, the proportion of private sector tenants in rent arrears has tripled.

Norris says that landlords are not asking the government to bail people out, but for enough support to let people help themselves. He adds: “If we can continue to work together towards that kind of targeted financial package and solution we all want to find, there’s an awful lot that can be done to work our way out of this.”

The NRLA will now submit a report based on the webinar to the Chancellor, the Housing Secretary and the Prime Minister’s Office.

Watch the webinar for free.

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CLADDING LATEST: Crisis sparks political unrest in Tory heartland

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The government’s failure to fully support leaseholders affected by the cladding crisis has sparked revolt in the Tory heartlands where local councillors have urged Housing Minister Robert Jenrick to do more to help.

Basingstoke and Deane Borough Council passed a motion earlier this year saying leaseholders including many buy-to-let landlords should not be forced to pick up the bill for any cladding-related work.

Tristan Robinson, the Conservative councillor with responsibility for homes and regeneration (pictured, above), has now told the minister how current government measures have not reduced the financial burden on owners in the town where seven high-rise apartment blocks recently failed cladding checks.

Unacceptable

In his letter, Robinson said: “It is the council’s view that the current situation is unacceptable and that the costs associated with remedial action for fire safety should be met by the building owner and not by residents whom purchased, or rent their properties in good faith.

“The current funding schemes comprising of the waking watch fund and the building safety fund certainly reduce the financial burden on leaseholders but crucially they have not reduced this burden altogether.”

He urged the government to consider making further funding available for those not covered by existing schemes. Robinson added: “In many cases residents are not only facing significant increased costs, but are also unable to sell their properties until the buildings are fully remediated.”

The waking watch fund pays for the cost of a new fire alarm to remove the costly 24/7 fire patrols, but does not cover the patrols themselves, while the building safety fund only supports the removal of unsafe non-ACM cladding system on residential buildings 18 metres and over.

Council comment

“These collective terms were simply used to refer to whoever incurs costs in terms of paying for waking watches and/or any fire safety remedial works which are needed,” a council spokesperson tells LandlordZONE.

“The council’s view is that these costs should not be borne by individual leaseholders (including landlords) or residents, and that such costs should either be covered by government grants or the ultimate freeholder of the building.”

Read more: Our interview with landlord caught up in cladding crisis.

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