1. UK Real Estate Industry Landscape

The Real Estate market in the UK comprised a diverse range of activities such as buying and selling of own real estate, renting, and operating own or leased real estate and fee-based real estate services on a contract basis. There are several sub-sectors such as residential real estate and commercial real estate. The Residential Real Estate encapsulates activities such as selling, renting, and buying diverse categories of residential properties. Furthermore, the Commercial real estate process is considered one of the vital indicators to track the performance of the economy. Moreover, the industry is an integral part of the UK economy as it employs approximately 514 thousand people.

The UK housing real estate market is fragmented due to low market share concentration. However, it is facing a shortage of houses or new constructions, which has led to higher demand. The market fundamentals remained attractive with the following key drivers: positive lending environment, clarity on Help to Buy scheme, demand continues to exceed supply and attractive land market. The government remains supportive of the industry and planning to introduce a people-focused system to accelerate the housebuilding with some automatic approval to meet the rising demand.

According to recently available data from the Office for National Statistics (“ONS”), the average house price in the UK has shown a year-on-year increase of around 10.2% to £256,000 during March 2021 as compared to a growth of about 9.2% in February 2021. The industry has witnessed the fastest annual growth rate since August 2007, driven by several factors such as stamp duty holiday extension and a mortgage guarantee scheme for first-time homebuyers. Furthermore, among the major geographies, the Wales region had demonstrated the highest growth rate of 11.0% during the period while Northern Ireland had shown the slowest growth rate of around 6.0% during the period.

Meanwhile, London had been the slowest growing city in the UK for the consecutive four months. Nonetheless, London remained the costliest place to purchase a house in the UK as the average price remained approximately £500,000 in March 2021. The second half of 2020 had witnessed encouraging progress in terms of average house price growth in the UK. In terms of categories, the price of detached properties had shown a rise of 11.7%, while the price of flats and maisonettes rose by 5.0% during a similar period. 

Growth catalysts in the Real Estate Sector

Risk Exposures to the Real Estate Sector

• Operational Risk - The delay in the project deliveries amid the Covid-19 pandemic can also lead to financial penalties. Moreover, the inadequate supply or availability of land or new sites can hamper the growth strategy. Furthermore, increased competition could increase land prices or make it harder to secure attractive sites.
• Macro-economic Uncertainty – Economic downturn and economic volatility can significantly impact the real estate market and consumer confidence.
• Reduction in consumer spending – The rise in unemployment levels and reduction in disposable income may cause a decline in consumer spending tendency, which could adversely impact consumer demand.

SWOT Analysis

Benchmark Index Performance

Based on the last two years performance, the FTSE All-Share Real Estate Investment & Services index has outperformed the FTSE 100 index and FTSE All Share index. Furthermore, the FTSE All-Share Real Estate Investment & Services index generated a return of about 7.69%; however, the FTSE 100 generated a return of around negative 1.09% and the FTSE All Share index produced a return of about 3.33%.

Figure 1: Two Year Benchmark Index Performance

 (Analysis done by Kalkine Group)

Real Estate Sector Outlook

The UK housing market has remained healthy in 2021 so far, boosted by continued strong customer demand, low interest rates and ongoing Government support, particularly for first-time buyers. According to the Nationwide House Price Index, the British house price had shown a jump of around 10.9% annually for May 2021. The leading mortgage lender in the UK had forecasted UK house price to show an uptrend during 2021, even after the end of the stamp duty holiday. However, it would make it difficult for first-time homebuyers to afford a home in the UK at such a high price. Moreover, it remained a bit of an astonishing fact for the industry experts to witness this level of encouraging performance from the UK housing market even after considering factors like business loans and wage subsidies. Furthermore, the demand would be boosted by the structural transformation in homebuyer’s behaviour due to work from environment and increasing requirement for garden phasing home in the UK. In a nutshell, the fundamentals of the UK housing market would remain encouraging, having an under-supply of new build housing, which is expected to continue over the medium term.

2. Investment analysis and stocks under discussion (TW., MSLH, IBST)

After gaining insights into the Real Estate sector, we would look at the business model of three Real Estate players listed on the London Stock Exchange.

A. Taylor Wimpey PLC (LON: TW.)

(Recommendation: Buy, Potential Upside: 20.29%, Market Capitalization: GBP 6.45 billion)

Taylor Wimpey PLC is an FTSE 100 listed residential property developer, which builds a wide range of properties in the different price range. It produces both private and affordable homes.

TW had paid a final dividend of 4.14 pence per share on 14 May 2021, while the ex-dividend date was 01 April 2021.

                                              

Valuation Methodology

Our illustrative valuation model suggests that the stock has an upside potential of 20.29% over the closing price of GBX 176.05 (as of 01 June 2021).

B. Marshalls PLC (LON: MSLH)

(Recommendation: Buy, Potential Upside: 22.50%, Market Capitalization: GBP 1.46 billion)

Marshalls PLC (LON: MSLH) is an FTSE 250 listed producer and supplier of landscape, driveways, garden and seating products and solutions.

The Company will pay a final dividend of 4.30 pence per share on 01 July 2021, while the ex-dividend date will be 03 June 2021.

Valuation Methodology

Our illustrative valuation model suggests that the stock has an upside potential of 22.50% over the closing price of GBX 728.50 (as on 01 June 2021).

C. Ibstock PLC (LON: IBST)

(Recommendation: Hold, Potential Upside: 9.75%, Market Capitalization: GBP 932.16 million)

Ibstock PLC (LON: IBST) is a Leicestershire, United Kingdom-headquartered leading manufacturer of clay and concrete building products in the country. The Company is a constituent of the FTSE 250 index.

On 04 August 2021, IBST expects to release interim results for the six months ending 30 June 2021. Moreover, IBST had paid a final dividend of 1.6 pence per share on 14 May 2021 with an ex-dividend date of 15 April 2021.

Valuation Methodology

Our illustrative valuation model suggests that the stock has an upside potential of 9.75% over the closing price of GBX 227.60 (as on 01 June 2021).

 *All forecasted data and peer information have been taken from REFINITIV.

*The reference data in this report has been partly sourced from REFINITIV.

*The "Buy” recommendation is also valid for the current price as covered in the report as on 02 June 2021.

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