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Rising house prices across the UK have made it increasingly difficult for people to get onto the property ladder. Although interest rates have been maintained at relatively low levels and government policies such as Help to Buy and SDLT relief have made it easier for first-time buyers, the fact remains that prices are relatively high versus incomes.
In response to house prices becoming less affordable, the build to rent sector is gaining in popularity. It essentially involves new developments that are built for the purpose of being sold to institutional investors and subsequently let, as opposed to being sold directly to the public. It could be a strong growth area, with two smaller companies offering investors the opportunity to benefit.
Last year saw the house price to earnings ratio reach its highest-ever level. The average house price in the UK now costs around 7.8x the average salary. This is up from 7.6x in 2016, and is showing little sign of slowing down. Although Brexit may cause a degree of uncertainty in the near term, ultimately, demand for housing is likely to remain robust given low interest rates and the government’s demand-side policies. And since the number of houses being built is set to lag population growth over the coming years, housing affordability could worsen.
Build to rent
As always, the market finds a solution to the challenges it faces. One potential remedy could be the build to rent sector, which seems to be increasing in popularity – particularly in London. As mentioned, developments are sold for the purpose of being rented on the private market. They are usually purchased by institutional investors who are seeking to generate what has proved to be consistent capital growth, as well as resilient income growth due to the high demand for rental properties.
The segment is expected to grow in the long run. In London, for instance, the number of private renters is expected to increase, to reach the same level as owner occupiers by 2025. Alongside affordability issues, renting provides greater flexibility for younger people. Newer and better-quality developments that can be rented easily may also seem preferable to purchasing an older property in a less desirable area.
Two smaller companies that are operating in the build to rent sector are Telford Homes (LON:TEF) and Watkin Jones (LON:WJG). Both companies have signed various agreements with institutional investors in recent quarters to construct build to rent developments. They remain upbeat about the potential for the build to rent sector in the medium term, and seem likely to focus greater resources on the area in future years.
Telford Homes has a P/E ratio of 8.2 at the moment, while Watkin Jones’ P/E ratio stands at 14.2. Their respective forward dividend yields are 4.6% and 3.7%. With both companies forecast to post positive EPS growth over the next two financial years, they could offer investment potential from a growth, value and income perspective.