Residential property stocks can be some of the best shares to own in tough economic times, as full-year financials from real estate investment trust (REIT) The PRS REIT (LSE:PRSR) on Tuesday show.
At 69.2p per share, the PRS share price has risen 4.4% following a positive reception from the market. But they remain 22% cheaper than they were at the start of 2023 as interest rates have risen.
Borrowing costs have grown as a result of Bank of England monetary tightening, while the value of the company’s property portfolio has also fallen as a result. I think this represents a great dip-buying opportunity for long-term investors like me.
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Strong rental growth
PRS’ latest financial update showed revenues soar 18% during the 12 months to June, to £49.7m. This was driven by a 17% increase in net rental income, to £40.2m.
The company’s decision to concentrate on building family homes is paying off handsomely. Supply shortages are especially high in this segment of the market, meaning the company’s like-for-like rental growth stood at an impressive 7.5% for the year.
This reflected blended growth of around 12% on re-lets to new tenants, and approximately 7% on renewals with existing tenants.
The trust has ramped up construction to capitalise on positive trading conditions and it had 5,080 completed homes on its books as of June. That was up 6% year on year.
Those solid numbers from PRS underline the wisdom of owning residential property stocks during downturns like these. Having a roof over one’s head is one of life’s essentials, and so the company collected 99% of its rents during the 12 months.
Pre-tax profit sank 63% year on year, to £42.5m. However, this reflected fair value adjustments on its investment portfolio caused by those interest rate rises.
So what next?
A steady stream of industry data suggests PRS’s rental income should continue steaming higher. Average rents in the UK hit a fresh record high of £1,278 per month in the third quarter, according to Rightmove. This was up 10% year on year.
The investment trust’s latest quarterly financials also released today reveal the boost the worsening supply balance is having on its revenues. Like-for-like rental growth at the company speed up to 9.8% between July and September.
Under REIT rules, PRS is required to distribute at least 90% of annual rental profits out in the form of dividends. So with rents steadily rising, there’s a good chance that dividends will remain at market-beating levels.
City analysts certainly think so. They expect the investment trust to make good on its pledge to pay another 4p per share dividend in financial 2024, meaning the forward dividend yield sits at a fatty 5.8%.
I fully expect PRS shares to deliver excellent passive income for years to come. Weak housebuilding rates and the decline of buy-to-let, combined with steady population growth, mean that Britain’s chronic rental home shortage should persist. So rental income at investment trusts like this should keep heading skywards.
