Covid-19 could be the catalyst for build-to-rent (BTR) to “come of age” according to residential for rent developer and manager Watkin Jones. It was already ramping up BTR alongside its core of student accommodation, but we now believe demand for purpose-built private rental could be further boosted by people choosing to rent and by an institutional hunger to replenish dwindling sources of yield. The recent interims showed BTR overtaking student housing’s pipeline and we believe WJ’s low-risk, capital light model is tailormade to serve this burgeoning market.
H1 results driven by BTR momentum. The 19 May interims showed a 17% rise in revenue to £186m, fuelled by a four-fold increase in BTR – a major part of the group’s five-year growth strategy. Adj PBT rose 6% to £27m. Pre-IFRS 16 net cash more than doubled to £38m. As previously announced, the interim dividend was suspended and financial guidance was withdrawn. Projects in England, Wales and Northern Ireland are now at c. 75% of pre-Covid 19 staffing levels albeit with a “modest” rise in costs.
Resilient finances preserve flexibility. Gross cash of £72m and £71m headroom on its new RCF allows WJ flexibility in the timing of forward sales in a currently “subdued” institutional investment market, rather than pressurising it to ‘chase’ deals. We believe growth will resume, albeit with some slippage in development timing.
Covid-19: short-term disruption, long-term opportunities. Construction programmes have been disrupted by the lockdown but we believe the economic implications of Covid-19 may increase demand for rental properties among occupiers and also investors, with the latter facing a dearth of company dividends and a collapse in rental income in the onetime institutional mainstay of retail property. Moreover, we envisage major opportunities to buy sites from distressed owners at attractive prices. In student accommodation, its new deal with Cranfield University could signal a new wave of partnerships to regenerate ageing campuses.
Unique defensive growth model. The group develops student and now BTR rental accommodation, forward-funded by leading institutional investors, thus reducing financial risk and capital requirements. It also has a growing accommodation management division, with strong revenue visibility and providing valuable synergies for student and BTR divisions, as well as a housebuilding business with tightly deployed capital.