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Private equity firms are recognising the potential of UK housebuilders

By Andrew Millar (pictured), Corporate Partner, Shoosmiths – Private equity interest in the UK’s property sector continues to see exponential growth. McCarthy & Stone, St Modwen Properties and Sigma Capita were just a few of the UK companies acquired by private equity investors in 2021. This pool of capital continues to flood the nation’s housebuilding sector and some of the biggest players in it.

With reports indicating that Bridgepoint is putting Miller Homes up for sale for over GBP1 billion, compared to the GBP650 million it paid in 2017, it is perhaps unsurprising that private equity is increasingly recognising that UK housebuilders have the potential to generate significant returns.
 
The rise of private equity investment in UK housebuilders comes at a time of unusually rapid growth in house prices, with the Office for National Statistics revealing the average cost of a UK home increasing by GBP25k in the 12 months to August 2021.
 
Strong price growth is matched by transaction volumes. The latest data from HM Revenue and Customs shows UK residential transactions rising sharply in September 2021, with seasonally adjusted figures up 67.5 per cent month-on-month and 68.4 per cent higher than September 2020.
 
Company valuations v market growth
 
Despite the booming market, UK housebuilder share prices remain stubbornly lower than early 2020 levels. The economic impact of Covid-19 caused housebuilder share prices to fall, with many struggling to recoup their pre-pandemic value in spite of strong commercial performances.
 
Supply chain disruption and cost pressures are also having an effect, alongside fears that future interest rate rises could push up mortgage costs and slow the demand for new homes.
 
The lower valuations mean buyers can acquire housebuilders at an attractive price.
 
McCarthy & Stone’s shares had been trading above GBP1.50 before the Covid-19 pandemic hit. Just over nine months later in January 2021, the Texas-based Lone Star Real Estate Fund acquired the retirement home builder for GBP647 million, equating to GBP1.20 a share.
 
While prices are favourable for private equity investors, the main lure remains the considerable freehold estates held by UK housebuilders. The value of which continues to increase in the current market.
 
It is not only the market value of these freehold estates that is of interest to investors, but also their long-term potential. In the case of Blackstone, the purchase of St Modwen Properties sees it also take ownership of the industrial and logistics assets that make up half of the firm’s portfolio by value.
 
Research from Savills shows that over 50 million sq ft of new warehouse space was leased in 2020 – 12 million more than the last record year in 2016. While the long-term impact of Covid-19 is yet to be realised, the pandemic is accelerating the growth of e-commerce and demand for associated real estate. Amazon alone was responsible for 25 per cent of all new UK warehouse space leased during 2020.
 
By purchasing UK housebuilders, buyers are also tapping into this potential and acquiring a range of assets, including land, residential and commercial estates. When considering the growth of their relevant markets, investing in UK property companies is currently an enticing prospect.
 
Long-term view
 
It isn’t just UK housebuilders grabbing the attention of private equity firms. More deals involving UK companies were struck in the first half of 2021 than in the same period in any year on record.
 
It’s important to highlight two factors that are contributing to this rise. The first is the performance of sterling.
 
The start of November 2021 saw the GBP-EUR exchange rate fall to 1.1664. This followed the Bank of England’s decision to hold central interest rates, with the pound falling more than 1 per cent in a week – a drop not seen since August and making the pound one of the biggest losers compared to the world’s largest currencies over a month period.
 
The weakness of the pound provides overseas investors with an additional incentive to enter the market, as seen by the deals already struck by US private equity firms in UK companies during 2021.
 
The second factor is the current sustained period of low-interest rates. The Bank of England’s decision to hold the central interest rate at a historic low of 0.1 per cent is keeping borrowing cheap.
 
Though a change is expected, with the Bank of England signalling it may raise interest rates in the “coming months”, the borrowing environment is likely to remain attractive to private equity firms, with a return to the high interest rates seen pre-2008 ruled out by Bank governor Andrew Bailey.
 
There is a wider argument for how the long-term performance of the UK’s property market may impact the appeal of housebuilders to investors. However, in the current borrowing environment, acquisitive private equity firms are unlikely to turn their noses up at the potential financial returns on offer.
 
What makes private equity firms so well positioned for acquisitions is the amount of capital they have ready to deploy – providing the cashflow flexibility to pursue investment opportunities. Data from S&P Global shows that in total, the world’s private equity firms have USD2.3 trillion ready in reserve.
 
So, with Persimmon and Vistry both stating that housing sales are continuing to run above pre-pandemic levels – against a backdrop of rising house prices – it’s more of a question of when, not if, the next UK housebuilder is the subject of a private equity backed acquisition.
 

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