MIDAS SHARE TIPS: Home in on cash from PRS Reit

 

The rental market is all askew. Around 400,000 rental properties have been sold by private landlords over the past seven years, and estimates suggest another 500,000 could go by 2028, amid increasing regulation and rising costs. 

The timing could not be worse. Despite reduced availability, renting is now cheaper than buying in many parts of the country due to higher mortgage rates, and would-be tenants are desperate for decent, affordable places to live.

PRS Reit aims to reduce that shortfall. The group was set up in 2017 to deliver high-quality homes for working families at affordable rates, while generating robust income for shareholders.

To date, it has delivered on each of those ambitions, amassing a portfolio of more than 5,000 purpose-built, private rental homes and paying attractive dividends along the way.

Yet PRS shares have fallen from £1.10 in the summer of 2022 to just 79p today, with investors deserting property stocks in droves, concerned by rising interest rates and weak economic growth. For PRS, the decline seems overdone, reflecting neither the value of its properties nor its growth potential.

Building returns: PRS Reit shares look like a bargain as the business fills a need for places to live

Building returns: PRS Reit shares look like a bargain as the business fills a need for places to live

PRS Reit operates primarily in the Midlands, the North of England and Scotland, acquiring land, working with housebuilders to construct modern, well-fitted properties and renting them out, often to young families.

Homes range from flats to four-bedroom houses, in just over 70 sites, all outside London and most north of Coventry. The properties attract widespread interest. Nationwide demand for properties is 50 per cent higher than the five-year average, according to Government statistics. Waiting lists are all too common and would-be tenants can be found bidding above the stated rent to try to secure somewhere decent to live. But PRS Reit is not all about maximising rent. Rather, founder Graham Barnet is keen to attract tenants who view their properties as real homes, places they want to stay for the long term.

This is not simply altruism. A veteran of the market, Barnet has a shrewd head on his shoulders and recognises that stable tenants tend to treat their homes better and are less likely to fall behind on rent, in turn generating consistent income for PRS shareholders.

To that end, Barnet and his team choose locations carefully, ensuring they are near schools, close to areas with plenty of jobs and offer good transport links.

The group also works at creating a community feeling on their sites, with initiatives ranging from pizza nights and Santa parades to phone apps that allow tenants to establish babysitting and dog-walking networks, or book clubs for the literary-minded. All this effort delivers results. Rental income rose 17 per cent to £40 million in the year to June 30, as individual rents increased and the company expanded its portfolio of homes.

Some people fell behind with payments, but arrears were extremely low, not least because average rents amounted to less than a quarter of household income, even though rents themselves rose year-on-year. Earnings per share were 3.1p in the last financial year and dividends were 4p, so some of the money paid out to shareholders came from the company’s balance sheet rather than tenants’ rents.

That should change this year, however, as PRS is on track to add another 400 homes to its portfolio, taking the estate to 5,500 homes, each of which will be generating rent and ensuring that dividends are covered by earnings.

Brokers predict a 16 per cent increase in rental income to more than £46 million by next June, rising to £51 million in 2025. Dividends are likely to remain at 4p this year, but they should rise steadily from 2024.

Home ownership remains out of reach for many and renting is often seen as the only alternative. But demand far outstrips supply and is expected to continue in that vein for years. PRS attacks this problem head on and Barnet is ambitious, keen to triple the size of his portfolio and then some in the coming years, once market conditions allow.

Midas verdict: PRS Reit shares have been hit by stock market woes and now look like a bargain. At 79p, the stock offers attractive dividend income, capital growth potential and the opportunity for investors to help solve one of the UK’s most pressing problems. Buy.

Traded on: Main market Ticker: PRSR Contact: theprsreit.com or 0333 999 9926


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