Grainger is a residential landlord that is principally focused on reversionary property in the South of England. Residential assets are bought at a discount, with a secured tenancy, and then sold at market value upon becoming vacant. In our view, the cut in stamp duty for UK homes worth less than £1m is supportive of Grainger's valuation.
Despite being the UK's largest residential landlord it is easy for investors to overlook Grainger. This is because of its differentiated business model whereby it plays a waiting game in buying low rent and secured tenancy property.
There is a valuation uplift when a unit becomes unoccupied and Grainger is also able to undertake some refurbishment. As such Grainger offers, in our view, a relatively low risk way to gain exposure to UK residential property.
Grainger has outperformed the market
Turning to performance and Grainger saw its triple net asset value up 24% to 242p in the year to September 2014. Triple net asset value includes the expected gain in value upon reversion (becoming vacant) and deducts the likely tax bill upon sale.
Since 2009 Grainger has outperformed the Nationwide and Halifax housing market indices. The company has also reduced its gearing with the loan to value ratio coming in at 46.5% at September 2014.
In the recent Autumn statement the UK Chancellor cut stamp duty for homes valued less than £1m and more than £250,000. The new system sees a higher stamp duty rate only applied to the extra increase in house prices above each band level.
Previously a purchase at £250,000 would mean a 1% stamp duty charge and just over this amount would incur a 3% charge. As such the £250,000 price level was a barrier for some home values to cross as the tax paid rose from £2,500 to £7,500.
Grainger's UK units by vacant possession value (September 2014)
Looking at Grainger's portfolio and 61% of units are worth below £250,000 and so will now have less of a barrier to move increase in value. Units worth from 250k to £500k make are 30% of the total and 7% are from 500k to £1m.
The change in stamp duty rules will therefore support the next valuation assessment which covers the six months to the end of March 2015. At September 2014 the triple net asset value was 242p and putting the shares on…
