Housing: stock market newcomers

Wednesday, 9th March 2016 13:23 - by David Harbage

There is considerable interest in the UK housing market both from personal savers (notably with retirement provision in mind) and, increasingly, institutional investors (in the private rental sector).

Often taking the form of a direct interest in property (buy-to-let), but also via stock market listed businesses. Earlier blogs have focused on house builders, both large and small (FTSE100 and AIM listed), national and regional, as well as real estate companies who specialise in residential property. In this blog we take a look at two other interesting housing-related companies which may not be that well known, as both are relative newcomers to the London stock exchange.

Urban & Civic is a £352m market capitalised real estate business which is characterised by its ownership and planned development of several huge swathes of land. Owning 4,000+ acres, the company plans to build 20,000+ new homes, 6m square feet of business space, 14 schools along with other sports and community facilities. Admitted to the main market in May 2014, after the assets of private group Urban & Civic were merged with (via a reverse takeover into) Terrace Hill and investors were encouraged to buy £170m of new equity at 225p per share. While analysts will debate if house builders should be assessed on asset value or their earnings, Urban & Civic’s success over the next three years will primarily be evidenced by the potential appreciation within its development sites. The company’s biggest pieces of strategic land are located in Cambridgeshire (1,425 acres at Alconbury Weald, 716 acres at Waterbeach), 1,170 acres at Rugby and 694 acres in Newark – typically ex-Ministry of Defence or other brown land, and the sort of development (primarily for new homes) the government has been keen to promote.

The final results for the year ended 30 September showed that the EPRA (fair value adjusted) net asset value (NAV) per share had risen to 272.1p, from 249.7p a year previously. Management expressed confidence in the prospects for its developments (citing £7bn of projected value over the next 15 years) and plans to increase its dividend at the same rate as its growth in NAV.  Urban & Civic also owns smaller developments in Bristol (apartments), Manchester (hotel, office & apartments), Southampton (university accommodation) and Stansted airport (hotel) amongst other locations. While construction of new homes has already begun at Alconbury and Rugby, delivering positive news flow over the next 12-18 months will be critical in maintaining cash resources (net cash of £32m, with £105m debt facilities available) and attracting new investors. Currently, there are only two brokers monitoring the stock (JP Morgan Cazenove – who increased their price target from 300p to 315p on 13 January – and Oriel Securities) and two disclosable holders on the shareholder register (Investec with 11% and APG a 5% stakes). Directors, who own 3.5%, have indicated that they are comfortable with forecasts of NAV rising to 292p in September 2016 and to 319p in the following year.

‘Hot on the heels’ of the publication, yesterday, of London estate agent Foxtons Group’s  final results for 2015, the second housing-related stock we are featuring is an online estate agent, Purplebricks, which was launched in April 2014 by brothers Michael and Kenny Bruce and listed on the Alternative Investment Market (AIM) on 17 December 2015. The business model is based on undercutting traditional estate agencies via a flat fee (£798 inclusive of VAT or £1,158 in London), employing local property experts (LPEs) to value properties and features a customer-friendly online platform. These LPEs are available for ongoing assistance (165 as at November 2015), are paid upon instruction and can recruit to expand their business. Purplebricks’ average fee is £1,080, boosted by additional fees – notably for accompanied viewings – and other revenue streams arise from referrals for conveyancing, mortgages and insurance.

In its interim results, announced on 26 January 2016, the company advised that having launched in London in July and Scotland in November, Purplebricks had increased its online market share from 43% in April 2015 to 60% as at 31 October 2015. However, this is very much a business in its infancy – featuring a pre-tax loss of £6m in the half year to end October, dented by Sales & Marketing expense of £6.6m – but offering considerable potential as indicated by anticipated 2,000 instructions in the month of January (equating to the UK’s fourth largest estate agent). The balance sheet, which featured £9.7m net cash, and bolstered by £22.8m proceeds from the placing in December, looks capable of facilitating another two years’ marketing spend by which time a clearer picture of how robust the business model will have emerged. 

The number of LPEs is expected to double by April 2017 and, with the benefits of scale becoming apparent, this business has the capability of being a truly disruptive one within its industry. The placing was backed by Neil Woodford’s investment vehicles (42% stake, currently worth £125m) as well as other well-regarded institutions Old Mutual (8%), Artemis (4.5%) and Fidelity (3.8%). On announcement of the results, directors bought more stock and these insiders now account for 30% - leaving little liquidity within this £330m capitalised stock. Notwithstanding such faith in its longer term prospects, the business is not without significant risks. There are an increasing number of online competitors who are charging less than Purplebricks and, while cannibalisation of premises-based agents is likely to continue, the overall level of transactional activity may slow – post the April 1 deadline when buying a second property will incur another 3% in stamp duty. In the absence of independent broker research, investors will have to make their own projections of when breakeven is achieved. Profitability should arrive in the second half of calendar 2017, is the writer’s best case view, but excess cash is likely to be reinvested in building the business (so don’t expect a dividend payment any time soon). 

Beyond being in the business of selling houses (and facilitating residential lettings) there could hardly be a bigger contrast with established agent Foxtons, which features a relatively mature business and pays out 90% of earnings – via share buybacks, as well as dividends equating to an attractive 7.1% yield. Beyond the lower disclosure (“mind your eye” for the inherent higher risk-reward) requirements for AIM listed companies, investors wishing to investigate long term opportunities within the domestic housing market have plenty of businesses to consider in addition to physical ‘bricks & mortar’.

Written by David Harbage for lse.co.uk on the 9th March 2016

The Writer's views are their own, not a representation of London South East's. No advice is inferred or given. If you require financial advice, please seek an Independent Financial Adviser.