1. UK Real Estate Industry Landscape

The Real Estate market in the UK encapsulated a list of companies focused on 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. Moreover, the overall industry can be bifurcated into two broader 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.

According to recently available data from the Office for National Statistics (“ONS”), the average UK house prices had shown annual growth of around 13.2% for the 12 months period ended June 2021, while it was approximately 9.8% during May 2021. Moreover, on a monthly basis, the average UK price rose by about 1.4% during June 2021 as compared to May 2021. The Northwest region witnessed maximum growth as prices increased by around 18.6% for the year to June 2021, while London had demonstrated the lowest growth at around 6.3% during June 2021.

However, the Bank of England’s Money and Credit report for June 2021 suggested that mortgage approvals for house purchases had reduced to 81,300 during June 2021 as compared to May 2021. According to the leading property site in the UK, Rightmove, the national average price had fallen by 0.3% to £337,371 during August 2021. Moreover, it stated that the buyer demand for the smaller homes remained robust despite a drop.  

According to the latest HMRC (“Her Majesty's Revenue and Customs”) data, the number of transactions had slumped by 62% from 213,370 UK homes during June 2021 to around 82,110 in July 2021.

Key Trends 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 six months performance, the FTSE All-Share Household Goods & Home Construction index has outperformed the FTSE 100 index but underperformed the FTSE 250 index. The FTSE All-Share Household Goods & Home Construction index generated a return of about 10.44%; however, the FTSE 100 generated a return of around 7.01%, and FTSE 250 generated a return of around 12.07%

Figure 1: Six Months Benchmark Index Performance

 (Source: Refinitiv; Analysis done by Kalkine Group)

Real Estate Sector Outlook

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. It is expected that the already high UK house prices will further eclipse over the next few years, driven by several factors such as low borrowing costs, supply shortages and a desire for more living space. The UK house price grew at a record annual rate during June 2021 since 2004. According to the leading UK housing broker, the UK housing price will witness strong growth of almost 21.5% over the next five years period. It also expects price inflation to slow down after the removal of government incentives. Overall, the industry would continue to witness long-term growth despite facing short-term headwinds due to the under-supply of new build housing.

2. Investment analysis and stocks under discussion (CRST, SPR, CSP)

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. Crest Nicholson Holdings PLC (LON: CRST)

(Recommendation: Buy, Potential Upside: 22.61%, Market Capitalization: GBP 1.05 billion)

Crest Nicholson Holdings PLC (LON: CRST) is an FTSE 250 Index listed company focused on the construction & development of residential properties in the Southern part of England.

CRST will pay an interim dividend of 4.10 pence per share on 14 October 2021, while the ex-dividend date will be 23 September 2021.

 One Year Share Price Chart

(Data Source: Refinitiv, Analysis by Kalkine Group)    

From a technical standpoint, the MACD line remained above the signal line, indicating an upside potential in the stock price. Moreover, the 20-days exponential moving average price of GBX 412.90 is also supporting the upside potential.

Valuation Methodology

Our illustrative valuation model suggests that the stock has an upside potential of 22.61% over the closing price of GBX 420.80 (as of 24 August 2021).

B.Springfield Properties PLC (LON: SPR)

(Recommendation: Speculative Buy, Potential Upside: 25.58%, Market Capitalization: GBP 158.58 million)

Springfield Properties PLC (LON: SPR) is an FTSE AIM All-share Index listed company engaged in housebuilding in Scotland. The company delivers private and affordable housing in partnership with Local Authorities, Housing Associations, or other public bodies. 

During September 2021, SPR will release FY21 results.

One Year Share Price Chart

 (Data Source: Refinitiv, Analysis by Kalkine Group)

From a technical standpoint, the stock price is hovering between the lower Bollinger band and the middle Bollinger band, indicating an upside potential in the stock price. The 14-day RSI of ~33.08 is also indicating an upside momentum in the stock price.

Valuation Methodology

Our illustrative valuation model suggests that the stock has an upside potential of 25.58% over the closing price of GBX 154.00 (as on 24 August 2021).

C. Countryside Properties PLC (LON: CSP)

(Recommendation: Expensive, Potential Downside: 35.82%, Market Capitalization: GBP 2.98 billion)

Countryside Properties PLC (LON: CSP) is an FTSE 250 listed Brentwood, United Kingdom-based urban regeneration, and housebuilder company. The company's business is differentiated into two divisions: Housebuilding and Partnerships. 

One Year Share Price Chart

 (Data Source: Refinitiv, Analysis by Kalkine Group)

From a technical standpoint, the momentum indicator 14-day RSI (~67.90) is inching towards an overbought zone and suggesting a correction in the stock price.  

Valuation Methodology

Our illustrative valuation model suggests that the stock has a downside potential of 35.82% over the closing price of GBX 571.50 (as on 24 August 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/Speculative Buy” recommendation is also valid for the current price as covered in the report as on 25 August 2021.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached.

Disclaimer

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