A growing population and increasing scarcity of land... How three Small Cap developers are coping
Companies: HWG, INL, UAI
Is this country is getting overcrowded?
It is considered that the UK population is expected to grow by 7% to some 72m people by 2040.
That will add to the pressure that our cities, towns and villages have to offer by way of infrastructure such as public places, amenities, services and of course new homes.
Planners and developers now need to take in mind how they will cope with new living, working and social behaviours.
As the population continues to grow over the next couple of decades, it is apparent that well over the Government’s aim of 300,000 new homes a year will be required.
It is believed that more than half of the UK land area is farmland, such as fields and orchards, while just over a third is natural or semi-natural, such as moors, heathland, and natural grassland.
Some 5.9% is built on, such as roads, buildings, airports and quarries, with around 2.5% being classed as green urban, like parks, community gardens, golf courses and sports pitches.
Whilst having one of the highest population densities in Europe, it is interesting to note that the actual amount of land taken up by homes and gardens across the UK is a little over 5% - 12,700 sq.km out of the total UK land of 244,000 sq.km.
So where is the land to come from for the residential developers to complete their growingly important task?
Much of the land that was once used for industry in this country now lies redundant. Planners call it ‘‘brownfield’ land’ and everyone is keen to see it brought back to life.
As it is usually located in urban plots it is ideal for housing, so planners look very favourably on ‘‘brownfield’’ redevelopment proposals.
In the UK a ‘‘brownfield’’ site is defined as ‘previously developed land’ that has the potential for being redeveloped. It is often land that has been used for industrial and commercial purposes and is now derelict and possibly contaminated. The UK is committed to developing ’brownfield’ sites as a priority.
That includes land or buildings that are not currently in use, either vacant, abandoned, and/or contaminated. The term usually refers to former industrial sites in urban areas that may need cleaning up before they can be redeveloped.
Many ‘brownfield’ sites are located in existing towns and cities. That means that much of the infrastructure needed for new homes, such as transport and utilities, is already in place, which can obviously reduce developer costs and timescales.
Professional land developers find that it can also be possible to gain planning permission on ‘brownfield’ sites in the countryside, especially if those sites are a nuisance or cause an eyesore. Plots on the edge of settlements are often the first that councils consider for new housing, particularly if that settlement is set to expand.
Substantial ‘brownfield’ sites, such as former hospitals or other government land, are often targeted for large-scale housing developments.
It is important that more houses are built upon ‘brownfield’ sites, because the less we have to build on previously undeveloped greenfield sites then that is good and much preferred.
My Research-Tree ‘Pick of the bunch’
This week I have selected three companies that I follow very closely, all are involved in urban regeneration and the use of ‘brownfield’ sites in their developing.
Harworth Group (HWG) – mkt cap £383.4m, price 117.5p
This Rotherham-based group is one of the leading land and property regeneration companies in the UK.
It regenerates land for development and investment that it owns, develops or manages.
The group specialises in the regeneration of large, complex sites, in particular former industrial sites, into new residential developments and employment areas.
It has a portfolio of approximately 18,000 acres of land on around 100 sites located throughout the North of England and Midlands.
Its developments cover some 25.4m sq.ft of commercial space and over 30,000 new homes.
Last week’s Trading Statement for the year to end December showed a strong operational performance despite Covd-19, particularly in its second half, beating Management expectations.
It is currently undertaking a comprehensive review to ensure that it optimises the returns from both its portfolio and its pipeline. By so doing it will then deploy appropriately its expertise to capitalise on its opportunities in the residential and industrial markets.
Chief Executive Lynda Shillaw stated that “We have a strong track record of acquiring, assembling and developing our strategic landbank and an unrivalled focus on creating places where people want to live and work."
The group is well capitalised, with net debt of £71.2m (30 June 2020: £69.2m). That reflects a Loan-To-Value rate of just 11.5% and it had substantial available liquidity of £62.7m as at 31 December 2020.
Analyst Chris Spearing at Liberum Capital is looking for the company to have added £1.8m to its annual sales at £26.2m for the 2020 year, with pre-tax profits having almost doubled to £2.1m (£1.1m).
For this year he goes for £27.1m of sales and £2.6m of profits, helping to pick up the group’s net asset value from 158p to 165p per share.
Its finals are due to be announced on 16th March.
Inland Homes (INL) – mkt cap £133m, price 58.25p
I have followed this company for the last fifteen years since it went public. Before that I was a keen fan of the forerunner group that its two main directors had built up before they sold it off.
So already you realise that I am keen on its management and respect their ability.
The company is an AIM-listed specialist housebuilder and ‘brownfield’ developer, dedicated to achieving excellence in sustainability and design.
The group has a team of established land professionals and house builders with a successful track record in the industry. Its focus is upon building residential and mixed-use communities for sale, or for partner organisations.
It acquires ‘brownfield’ land in the South and South-East of England, principally for residentially led development schemes.
The business then enhances the land value by obtaining planning permission, before building open market and affordable homes, or selling off chunks of surplus consented land to other developers in order to generate cash for subsequent sites and development.
Its management is always looking for ‘brownfield’ sites without planning permission for future development.
Such a site that the group currently has plans for is the former Master Brewers Hotel site in Hillingdon, London. Vacant for over eleven years Inland acquired it and drew up extensive plans for a development of more than 500 new homes.
Effectively it is planning to utilise the old site to deliver much needed affordable homes. Obviously, like practically every development scheme anywhere in the country, there have been loud voices of dissent about the scheme, but Inland has, as always, done considerable work in advance. It remains confident that it will win full approval for the development.
This scheme is being steered by the group’s asset management division, which is currently involved in six similar projects on behalf of investors, totalling some 3,181 homes.
The group has a strong and balanced portfolio. It operates a balanced and flexible business model. It has a very impressive team of land-planning experts. Importantly it has a proven self-build and partnership capability.
Inland will be announcing its results for the year to end September on Monday of next week (8th). They will show the major impact that the Covid-19 virus had upon its business, closing down various sites and sales offices.
It will be interesting to see just how Quoted Data and Hardman & Co report upon the results and the group’s prospects going forward.
However, it is very much about how the group sees itself ‘developing’ in this current year. So, a positive prospects statement will help to boost the share price.
U and I Group (UAI) – mkt cap £106m, price 84.5p
U+I operates in a large, fast growing market, where there is an urgent need for the type of mixed-use regeneration projects that it delivers.
The group states that it secures land that is right for community focused regeneration and mixed-use development projects. Such sites are often underestimated and overlooked, full of heritage and potential, and the prospect of their development is too complex for others to consider handling.
The group’s management believes that it is good at securing sites. It uses its strong relationships to lead to off-market deals. It has a proven track record of more than 25 years and its focus is upon regions where planning policy promotes regeneration.
The group unlocks and then adds value to its sites. It regenerates and develops, it trades out all or part of its developments, while also adding value through asset management, refurbishment and lease extensions.
Quoted Data in its Real Estate Annual Review, out on 22nd January this year, stated that the UAI share price reached an all-time low during the last year as it continued to battle against declining land and development values across its portfolio.
On 19th January the group announced its interims to end September last. They were ghastly in appearance, showing £25m of development and trading losses and a pre-tax loss of £50.2m. Its net assets dropped from £327m to £240.5m.
Its basic net asset value fell from 263p to 193p a share. Its balance sheet gearing was slightly lower at 46% (47.1%).
But looking deeper, it actually showed that the company’s management had taken some decisive actions in cutting cost, while strengthening its balance sheet. It is also now undergoing something of a management change.
Come the 26th May we should be getting the finals to end March this year, together with the results of a Strategy Update that is now underway.
Analyst Tom Musson at Liberum Capital commented that “U+I is operating with low visibility, not unlike many other companies across the world right now. However, we still expect U+I to deliver material equity upside in the medium term, given its asset base.”
He reckons that turning the group’s net asset value into cash will help to lower the net asset value discount, upon which the shares are currently trading.
I rate highly the upside potential of these shares and I have been noting significant Director share purchases in the last two weeks – that is certainly good enough for me.
About the author
He has been around the track a few times, now this former stockbroker and AIM company boss, gives us his views and pointers on his specialist subject – The UK Smaller Company Sector.
His comments are his own, he is not giving readers advice on whether you should Buy, Sell or Hold any of the companies that he might mention in his market ramblings.
He does not know what you might be looking for in your market dealings, so it is imperative that you must make up your own mind on his column’s content.
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