BREWIN DOLPHIN : How to invest in the UK’s chronic housing shortage

21 February 2024

The UK's housing shortage has been a longstanding issue, and recent statistics suggest there is no imminent turnaround in the offing. But, despite independent landlords exiting the market in their droves, it could still present an investment opportunity with a different approach, according to wealth manager RBC Brewin Dolphin.

While there has been some progress, the UK Government's target of 300,000 new homes per year has never been achieved in the past 20 years, with the highest number of starts totalling 191,270 in the year ending June 2023 and the largest volume of completions peaking at 181,940 in the year ending June 2021¹.

Permissions granted for major residential developments fell to their lowest level on record during 2022², suggesting the next few years will see starts and completions remain some way off the required levels.

At the same time, the rental market has been going through a similar structural imbalance. Zoopla described the last three years as being characterised by a 'chronic mismatch' between supply and demand³. Yet, research from 2022 found the build-to-rent sector accounted for just 2% of the UK's private rented sector (PRS) households⁴, suggesting there is ample room for growth.

However, a changing legislative backdrop - such as minimum energy efficiency regulations and changes to taxation - and rising mortgage costs are reducing the attractiveness of investing in buy-to-let (BTL) properties. Figures from Which indicate the average BTL mortgage remains north of 6%⁵ and the share of mortgages for BTL purposes fell during Q3 2023 to the lowest level in 13 years⁶.

John Moore, senior investment manager at RBC Brewin Dolphin, said: "It is well known that the UK has an enduring housing shortage and it has done for decades. For the most part, the problem is a simple case of supply-demand imbalance, but it has become a political hot potato in the build up to the next election as it becomes a key focus for both parties.

"There are clear structural drivers at play - a target of 300,000 new homes delivered every year has been set, but it has never been achieved. The annual deficit has built up over time to create a big cumulative shortfall and demographic changes mean demand is only rising.

"Yet, the attractiveness of becoming a BTL landlord has seldom been lower, between policy changes - such as the cap on rent increases for existing tenancies in Scotland - designed to make more homes available for sale, the rising costs of borrowing, and the asset management that comes with owning your own properties.

"A better way to invest in the housing shortage may be to look to the companies actively working to address the issue - such as build-to-rent providers, housebuilders, and the ancillary services they need - providing a property-like yield without the hassle of being a landlord. An investment professional will be able to guide you through how to do that and create a risk-adjusted portfolio of investments that includes exposure to themes like the housing shortage, among a range of others."

PRS

PRS REIT - John said: "The PRS REIT, managed by Sigma Capital since 2017, invests in high-quality, new-build family homes for the private rental market. It has agreed a series of joint ventures with local authorities and has scale and credibility in the niche it has developed for itself. Even though it is one of the scale players in the sector, it only manages 5,000 units, which is a drop in the ocean of a 300,000 per year new homes target - so there is huge room for growth. Yet, the share price has not reflected any of that - it trades at a substantial discount to net asset value (NAV) and offers a yield of more than 4.5%⁷."

Grainger - John said: "Grainger is a long-established company that designs, builds, develops, owns and operates rental properties. The share price has been a bit all over the place through its history, but it is a strong, asset-backed, independent business. With a portfolio of around 10,000 PRS homes, it has the most scale of any listed provider with a good runway for expansion. Both Grainger and PRS REIT delivered when others didn't, yet they are still not particularly highly valued. Grainger only yields 2.5%⁸, but there is plenty of scope for both capital appreciation and growth of income."

Housebuilders

Vistry - John said: "Vistry is at the centre of the rented housebuilding side of the issue. It is increasingly becoming an asset-light, joint venture-focussed operator, as it seeks to manage risk in what can be a tricky business. There has been a lot of movement in Vistry's share price since interest rates picked up - even by the sector's standards. But it should be in line to benefit as greater efforts are made to reform the planning system and provide more affordable housing, while offering a yield of nearly 6% in the meantime⁹."

Persimmon - John said: "Persimmon is one of the classic volume operators in the housebuilding sector. Along with peers like Taylor Wimpey, its share price fell to levels last seen at the tail end of 2021, as interest rates rose from record lows to their highest point in more than a decade. The company has a good track record, strong balance sheet, and its performance has remained relatively resilient against a tough backdrop. While the shares have recently rallied off low levels, there could still be some way to go and it offers a 4.4% yield¹⁰."

Supply chain companies

CRH - John Said "CRH is a large aggregates, cement and ready-mix concrete supplier and, while the company has moved its listing away from the UK to the US, its presence on the ground remains. Brands like Tarmac and Blue Circle are key parts of the construction supply chain and CRH will also benefit from similar international drivers too. The dividend yield on CRH is lower than average at around 2%¹¹, but the company offers growth potential as a consolidator of smaller, fragmented operators in addition to the benefits of its capital investment programme."

Travis Perkins - John said: "Travis Perkins is a builders merchants and materials supply company, serving the housebuilding sector among other areas of the construction industry. There is more risk with supply chain businesses, as housebuilders tend to try and put as much of the financial risk involved as they can onto their suppliers. Travis Perkins has had a tough time in recent years, but that is built into the share price and it should be among the beneficiaries of any pick up in housebuilding activity, with investors receiving a dividend yield of close to 5% in the interim¹²."

Disclaimers

The value of investments, and any income from them, can fall and you may get back less than you invested. This does not constitute tax or legal advice. Tax treatment depends on the individual circumstances of each client and may be subject to change in the future. Neither simulated nor actual past performance are reliable indicators of future performance. Performance is quoted before charges which will reduce illustrated performance. Information is provided only as an example and is not a recommendation to pursue a particular strategy., We or a connected person may have positions in or options on the securities mentioned herein or may buy, sell or offer to make a purchase or sale of such securities from time to time. For further information, please refer to our conflicts policy which is available on request or can be accessed via our website at www.brewin.co.uk. Information contained in this document is believed to be reliable and accurate, but without further investigation cannot be warranted as to accuracy or completeness.

RBC Brewin Dolphin is a trading name of Brewin Dolphin Limited. Brewin Dolphin Limited is authorised and regulated by the Financial Conduct Authority (Financial Services Register reference number 124444) and regulated in Jersey by the Financial Services Commission. Registered Office: 12 Smithfield Street, London, EC1A 9BD. Registered in England and Wales company number: 2135876. VAT number: GB 690 8994 69.

- ENDS -

PRESS INFORMATION

For further information, please contact:

Peter McFarlane [e-mail] / 07412 739 093

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NOTES TO EDITORS

About RBC Brewin Dolphin

RBC Brewin Dolphin is one of the UK and Ireland's leading wealth managers and traces its origins back to 1762. With £51.8* billion in assets under management, we offer award-winning, personalised wealth management services from bespoke, discretionary investment management to retirement planning and tax-efficient investing.

Our qualified investment managers and financial planners are based in 33 offices across the UK, Jersey and Republic of Ireland. They are committed to the most exacting standards of client service, with long-term thinking and absolute focus on our clients' needs at the core.

As part of Royal Bank of Canada (RBC), we are now able to draw on the strength of a global financial institution to continue to improve the service we provide to our clients and drive further innovation across our business.

*as at 31^st October 2023.

About RBC

Royal Bank of Canada is a global financial institution with a purpose-driven, principles-led approach to delivering leading performance. Our success comes from the 94,000+ employees who leverage their imaginations and insights to bring our vision, values and strategy to life so we can help our clients thrive and communities prosper. As Canada's biggest bank and one of the largest in the world, based on market capitalization, we have a diversified business model with a focus on innovation and providing exceptional experiences to our more than 17 million clients in Canada, the U.S. and 27 other countries. Learn more at rbc.com.

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1. Source: https://www.gov.uk/government/statistics/housing-supply-indicators-of-new-supply-england-april-to-june-2023/housing-supply-indicators-of-new-supply-england-april-to-june-2023
2. Source: https://www.housingtoday.co.uk/news/residential-permissions-fall-to-lowest-level-on-record/5122574.article
3. Source: https://www.zoopla.co.uk/discover/property-news/rental-market-report/
4. Source: https://btrnews.co.uk/investment-into-uks-btr-sector-topped-4bn-in-2021/
5. Source: https://www.which.co.uk/news/article/whats-happening-to-buy-to-let-mortgage-rates-aPCwx0Y6FH3h
6. Source: https://www.bankofengland.co.uk/statistics/mortgage-lenders-and-administrators/2023/2023-q3
7. Source: https://www.hl.co.uk/shares/shares-search-results/p/prs-reit-ordinary
8. Source: https://www.hl.co.uk/shares/shares-search-results/g/grainger-plc-ordinary-5p
9. Source: https://www.hl.co.uk/shares/shares-search-results/v/vistry-group-plc-ordinary-50p
10. Source: https://www.hl.co.uk/shares/shares-search-results/p/persimmon-plc-ordinary-10p
11. Source: https://www.hl.co.uk/shares/shares-search-results/c/crh-plc-ordinary-eur0.32
12. Source: https://www.hl.co.uk/shares/shares-search-results/t/travis-perkins-plc-ord-gbp0.11205105