Author: SC
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1. Construction Activity
The UK and Ireland are markets generally described as suffering from significant undersupply of homes[1]. The British government has had a goal of 300’000 homes a year since 2006, although the peak construction rate was reached in 2019-2020 at 243’000 homes after falling significantly in the aftermath of the global financial crisis[2]. In Ireland, Knight Frank estimates around 60’000 new residential units per year are needed[3], compared with around 30’000 per year built and targeted by the government until 2030. With these numbers, combined with inflationary pressures, it should be no surprise that rents have been increasing at an extremely fast pace, especially in Ireland (Figure 1). Since 2012, average rents in Dublin have doubled, according to data presented by a listed Irish landlord.
Figure 1: UK and Ireland indexed rents. Source: Office for National Statistics.
Construction in the UK has slowed down significantly since the peak before Covid. This applies to both commercial and residential, although the commercial sector, on average, never really recovered after Covid (Figure 2), while residential jumped back and has been slowing down in recent months. Work-from-home trends can be at least part of the explanation for this divergence. On the other side, estimated Repair & Maintenance activity appears to have been very strong, picking up after Covid and accelerating into the end of 2023 and the start of 2024. This may somewhat moderate the pace of recovery for new construction going forward, but the disappointing state of the UK housing stock[4] may provide support for higher-than-normal renovation, given it has the highest proportion, relative to EU peers, of stock built before 1946 (even considering many of those buildings will be high-quality historic buildings) and is only slightly below the EU average when it comes to buildings built between 1946 and 1980; also, as of 2020, 15% of UK homes were reported to fail the Decent Homes Standard (set by the Government), which is marginally above a European benchmark average[5]. Companies like James Latham, included in our portfolio, active in both Britain and Ireland, are well positioned to profit if R&M remains strong or new construction regains traction.
Figure 2: UK construction volumes (indexed). Source: Office for National Statistics.
2. Demographics
UK demographic trends have been solid. And interestingly so, considering Brexit and Covid in a relatively short sequence. Whether the rate of growth can remain sustained despite the downtrend in fertility rates (Figure 3) is an open question, as it will strongly depend on immigration, which in turn will depend on future immigration policies and the overall attractivity of the country. As shown in Figure 4, immigration has been a major driver of population growth in the last decade, and its importance has grown after Covid.
Figure 3: UK population and fertility rate. Source: Office for National Statistics.
Figure 4: UK population growth and net immigration. Source: Office for National Statistics. Adjustments by Timber Finance.
Ireland, with a relatively high fertility rate for European standards[6], is well positioned for future demographic growth. According to Eurostat projections, Ireland is also one of the countries in Europe expected to grow the most in terms of population over the next several decades, together with Sweden[7].
[1] https://www.bloomberg.com/news/articles/2024-02-13/uk-elections-housing-shortage-key-issue-for-labour-tory-candidates
[2] https://commonslibrary.parliament.uk/research-briefings/cbp-7671/
[3] https://www.euronews.com/business/2024/03/28/irelands-housing-crisis-tens-of-thousands-of-new-builds-needed#:~:text=Dara%20Turnbull%2C%20research%20coordinator%20at,the%20period%2C%22%20he%20added.
[4] https://www.theguardian.com/society/2024/mar/25/uk-housing-is-worst-value-for-money-of-any-advanced-economy-says-thinktank
[5] https://www.hbf.co.uk/documents/12890/International_Audit_Digital_v1.pdf
[6] https://ec.europa.eu/eurostat/statistics-explained/index.php?title=Fertility_statistics
[7] https://ec.europa.eu/eurostat/statistics-explained/index.php?oldid=497115#Population_projections
3. Disclosures and Conflicts of Interest
Some or all the companies mentioned in this report may be included in the Timber Finance Forest-Based Construction Basket tracker and are part of the Timber Finance Carbon Capture & Storage Index. Timber Finance Management and/or the Timber Finance Initiative may have commercial relationships or be in discussions with some of the companies mentioned in this report. Specifically, Stora Enso is a member of the Timber Finance Initiative association.
Please note that this research is prepared for information purposes and targeted to institutional investors in Switzerland. They do not represent investment advice and do not take into consideration the individual requirements, risk tolerance and goals of an investor. Recipients who are not Swiss institutional investors should seek the advice of their independent financial advisor prior to taking any investment decision based on this report or for any necessary explanation of its contents.
The information presented in this report is obtained from several different public sources that we consider to be reliable. Nevertheless, we cannot guarantee the accuracy of the presented information. The information used may change quickly and we are not committed or obliged to modify the reports base on new information. The opinions and views expressed in this report reflect those of the author at the point in time of its compilation and may vary at any time. Valuation methods like DCF and any other analysis or expert judgement do not provide any guarantee that the target price or fair value will be reached, for example because of unforeseen changes in financial or economic conditions.
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