Investors Chronicle looks at a potential REIT that could be perfectly positioned to capitalise on the UK’s rising rents and booming Build-to-Rent market. The cost of renting a home in the UK is increasing at an unprecedented rate, with record-breaking annual rent increases for 10 consecutive months. This trend is seen across all regions of the UK, including London. The surge in rental demand is driven by factors such as high immigration, low housing supply, stricter legislation, and alternative revenue streams affecting buy-to-let landlords.

Grainger (GRI), a long-established residential landlord, is well positioned to capitalise on this rental demand. The company targets mid-market renters with city center living, primarily in London. Grainger’s progress towards becoming a real estate investment trust (Reit) could benefit income investors, as Reits are legally required to distribute a significant portion of their taxable income as dividends. If Grainger becomes a Reit as planned, investors buying now could see a dividend bump. Additionally, Grainger would be the only true build-to-rent (BTR) Reit in the UK, further distinguishing itself in the market.

Rental Market Overview:

1. Rising Rents: UK rental costs are soaring, with a record-breaking pace. As of July, rents increased by 5.3% annually.
2. Consistent Growth: This isn’t just a sudden surge. Since May 2022, every month has recorded higher annual rent growth. Even historically stable places, like London, have seen significant hikes.

Pros of Grainger (Bull Points):

1. High Demand: There’s an increasing demand for rented homes in the UK.
2. TfL Partnership: Grainger has collaborated with Transport for London (TfL) to develop 1,240 homes over the next three years.
3. Dividend Potential: The shift towards becoming a REIT (Real Estate Investment Trust) may lead to higher dividends for investors, as REITs must distribute 90% of their taxable income as dividends.
4. Stable Value: Despite rising interest rates, the value of their assets remains robust.

Concerns about Grainger (Bear Points):

1. High Debt: Grainger’s net debt stands at 72% of its net assets, which is higher than many competitors.
2. Share Price vs. Value: Grainger’s share price is close to its Net Asset Value (NAV), prompting questions about its investment value compared to other REITs.
3. Competition: Private equity and other big players in the Build-to-Rent (BTR) sector may challenge Grainger’s dominant position.

Why is Grainger a Standout?

1. History and Stability: Founded in 1912, Grainger is a long-standing player in the market, offering city centre living options, mainly in London.
2. Unique Offering: With a focus on the booming BTR sub-sector, Grainger’s assets, especially in London, have seen rents rise faster than the market average.
3. Successful Strategy: Their strategy revolves around being the first to develop in prime locations, like near tube or train stations in London.

Current Market Dynamics:

1. High Demand, Low Supply: The driving force behind the rising rents is a mismatch between demand and supply. There are many theories, including high immigration rates, but the consensus is that housing supply is falling short.
2. Grainger’s Positioning: The company is well-placed to cater to this rising demand with its long history and significant portfolio.
3. Potential REIT Status: Grainger’s plans to become a REIT could mean increased dividends for investors.

External Viewpoints:

• Estate agents Savills noted that BTR rents surged by 10.4% annually in Q2 2023. This signifies the popularity and potential of BTR properties.
• Institutional investors are showing significant interest in BTR stock, emphasizing its growth potential.

Final Thoughts: Grainger’s history, strong positioning in the BTR market, and partnerships, like the one with TfL, set them up well for future growth. However, investors should consider the challenges like high debt and competition before diving in.