"An Englishman's home is his castle."
--Sir Edward Coke
LONDON -- It's said we Brits are obsessed with homeownership, and our collective over-investment in residential property definitely played a major part in causing the current downturn -- and the one before that! So, given our interest in housing, it is quite surprising to discover there are relatively few opportunities to invest in quoted companies that specialize in owning residential property.
Some people use builders such as Persimmon as a proxy for the housing sector, but performance of builders tends to be more closely geared to the levels of new construction rather than the housing market as a whole. However, there are a few residential property specialists quoted on the London Stock Exchange. You just have to look closely.
Much smaller companies
The listed property sector is dominated by giant commercial property companies with little or no residential interests. Prominent examples from the FTSE 100 include British Land and Land Securities.
The companies whose business involves owning and renting out residential property are much smaller. Three of the larger ones are Grainger (LSE: GRI.L ) , Mountview Estates (LSE: MTVW.L ) , and Unite Group (LSE: UTG.L ) , each of which has a very different business model. Grainger owns and manages residential properties, both for itself and specialist unquoted property funds such as the Jersey-based G:res1. Meanwhile, Mountview Estates buys regulated-tenancy properties at a substantial discount to their vacant possession value, which it then sells when they become vacant. And Unite Group develops and manages accommodation for students in conjunction with universities and colleges.
Show me the money
I've summarized the key figures for these three companies in the table below, based upon the figures in their most recent sets of accounts.
Share Price (pence)
Net Asset Value (pence)
Discount to NAV
Market Value (pounds)
|Mountview Estates||4,300||5,590||23%||3.8%||168 million||29.4%|
|Unite Group||181||318||43.1%||1%||290 million||45.5%|
Property companies nowadays will generally quote two very different net asset values: one with and one without deferred taxes and mark-to-market adjustments for derivatives contracts. These differing NAV values are something investors need to watch out for, though there are good reasons why companies leave deferred taxes and derivative contracts out of their NAV calculations.
Grainger's NAV quoted above is its "triple net asset value," which includes the deferred tax and derivatives adjustments (its "gross NAV" is 224 pence per share if you exclude them). Meanwhile, Unite's NAV of 318 pence per share is produced by excluding these same factors. For Mountview Estates, I've calculated my own NAV based upon the group's last set of half-yearly accounts.
How they've done
Grainger and Unite Group have had a tough time of it in the last five years, and this is reflected in respective share-price falls of 85% and 55%. This doesn't just reflect the downturn in the residential property market; like most other property companies, they have had to manage their substantial debts. In contrast, Mountview's shares are down by just 7% in the same period, in large part because of the group's far lower level of borrowings. The directors of Mountview Estates and their families own about 53% of its shares. Where a company is run by people who have their own money on the line, the firm will tend to be more conservatively managed than if the senior managers had a tiny stake but were heavily incentivized to engage in risk-taking through generous share-option packages.
Whereas Grainger and Unite have cut their dividend in recent years, Mountview's dividend has been steadily increased from 126 pence in 2005 to 165 pence per share in 2011.
The boss of "Fizzy Living," the Thames Valley Housing Association's private company, has coined the term "rentysomethings" to describe people whose incomes are too high to qualify for social housing but who are unable to raise the deposit for a mortgage.
They are prime candidates for private-sector renting, but many are put off because they aren't happy with what the market currently offers. That's because many private landlords are just part-time property managers, so they can be somewhat slow when it comes to addressing complaints such as faulty central heating. Furthermore, many tenants would prefer a much longer lease than the industry standard of six months.
Rising demand for rented property
As the number of rentysomethings grows and people now come to terms (once again!) with the fact that house prices can fall as well as rise, this should increase the demand for professional private-sector landlords who employ full-time staff to manage their properties, and whose tenants are on long-term leases.
These properties could be somewhat similar to the continental European apartment blocks, which are managed by concierges but built specifically for private-sector rentals, as Fizzy Living is currently doing with several of its projects. What's more, this renting trend is something many investors could be very interested in. Not only is residential property another way to diversify your portfolio, but a private-sector landlord that uses no debt would be a pretty good proxy for the housing market as a whole. Maybe someone will float such a company on the stock market in the near future; but in the meantime, Mountview Estates is firmly on my watchlist.
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