Jul

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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