1. UK Real Estate Industry Landscape

In the United Kingdom, the real estate market encompasses a group of enterprises specializing in purchasing and selling real estate, the rental and operation of own or leased real estate, and fee-based real estate services on a contract basis. Furthermore, the entire industry can be divided into two broad sub-sectors, residential and commercial real estate. Residential real estate encompasses selling, renting, and purchasing many residential properties. Furthermore, the commercial real estate process is regarded as one of the most important markers for gauging the economy's performance.

According to recently available data from the Office for National Statistics (“ONS”), the average UK house prices in the United Kingdom climbed by 10% in the year to November 2021, compared to 9.8% in October 2021. In November 2021, the average UK property price was £271,000, up £25,000 from the same month in 2020.

With reference to the data from the leading mortgage firm released on 01 February 2022, house prices surged in January 2022, marking the best start to any year since 2005. Following a 1.1% gain in December 2021, house prices increased by 0.8% in January 2022. House prices were 11.2% higher in January 2022 than in January 2021, the most significant yearly growth since June 2021 and well ahead of the average projection of 10.8%.

According to the Bank of England, consumer price inflation touched an almost 30-year high of 5.4% in December 2021 and is expected to peak at over 6% in April 2022.

Key Trends in the Real Estate Sector

Risk Exposures to the Real Estate Sector

• Inflationary Pressure: The rise in inflation level to 5.4% in December 2021 and increase in home prices by the government may cause a decrease in consumer spending tendency, which might have an adverse impact on consumer demands.
• Operational Risk: Financial penalties may be imposed if project deliveries are delayed because of the Covid-19 pandemic. Furthermore, an insufficient quantity or availability of land or new sites can stymie the expansion strategy. In addition, more competition may raise land prices or make it more difficult to secure desirable locations.
• Macro-economic Uncertainty: The economic downturn and volatility can significantly impact the real estate market and consumer confidence.

SWOT Analysis

Benchmark Index Performance

Based on the last one-year performance, the FTSE All-Share Construction & Materials index has outperformed the FTSE 100 index and the FTSE 250 index. The FTSE All-Share Construction & Materials index generated a return of about 27.10%; however, the FTSE 100 generated a return of around 16.54%, and FTSE 250 generated a return of around 8.71%

Figure 1: One Year 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 already expensive UK house price 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. According to the Office for National Statistics, the UK house price grew at record annual rate during January 2022. Overall, the industry would continue to witness long-term growth despite facing short-term headwind due to under-supply of new build housing.

2. Investment analysis and stocks under discussion (BDEV, CRST, and BOOT)

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. Barratt Developments PLC (LON: BDEV)

(Recommendation: Buy, Potential Upside: 20.19%, Market Capitalization: GBP 6.27 billion)

Barratt Developments PLC (LON: BDEV) is an FTSE 100 Index listed entity engaged in developing and acquiring lands and involved in the designing & construction of residential property developments.

On 09 February 2022, the Company will release H1 FY22 interim 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 ~28.61 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 20.19% over the closing price of GBX 613.40 (as on 01 February 2022).

B. Crest Nicholson Holdings PLC (LON: CRST)

(Recommendation: Speculative Buy, Potential Upside: 11.46%, Market Capitalization: GBP 825.74 million)

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.

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 ~41.58 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 11.46% over the closing price of GBX 321.40 (as of 01 February 2022).

C. Henry Boot PLC (LON: BOOT)

(Recommendation: Expensive, Potential Downside: 33.09%, Market Capitalization: GBP 379.96 million)

Henry Boot PLC (LON: BOOT) is an FTSE All Share listed company engaged in construction and property development business.

The Company’s preliminary statement of results will be issued on 23 March 2022. 

One Year Share Price Chart

(Data Source: Refinitiv, Analysis by Kalkine Group)

From a technical standpoint, the stock price is hovering between the middle Bollinger band and the upper Bollinger band, suggesting a correction in the stock price.

Valuation Methodology

Our illustrative valuation model suggests that the stock has a downside potential of 33.09% over the closing price of GBX 285.00 (as on 01 February 2022).

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

Note 3: Dividend Yield may vary as per the stock price movement.

Note 4: Target Price refers to a price level which the stock is expected to reach as per the relative valuation method and or technical analysis taking into consideration both short-term and long-term scenarios.

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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