Grainger plc (GRI) Earnings Call Transcript & Summary

So good morning, everyone, and welcome to Grainger's full year results. It's so good to see you all in person. I'm joined this morning by -- with Rob Hudson, our new CFO. And Rob has been in the business for 10 weeks now, but he's already all over the numbers, which he's going to be presenting to you later. I'm pleased to say the company is in a strong position despite the many challenges of multiple lockdowns. The business has remained resilient throughout the pandemic, with only a slight drop in occupancy, which I'm pleased to say we have now recovered. Throughout the pandemic, our growth strategy continues unabated, and we have real momentum in the business, and we're about to accelerate into our next stage of growth. We have boosted our pipeline. We are ahead of our plan, and we have evidenced the fundamentals of the build-to-rent sector and, in particular, Graingers' homes. So the format for this morning is that I will take you through the highlights, and in particular I'm going to cover the strong letting momentum, which is the signal for further growth ahead. Why this business is not only a business that performs well financially, but is a socially responsible business and how our operating platform has enabled us to outperform. And of course, I'll take you through our pipeline of new schemes coming forward. Rob Hudson, our CFO, will take you through our financial review, but he will also explain in more detail the growth that we have achieved this year and the growth to come. And he'll take you through a greater insight into the resilience and potential of this business. I'll then update you on the market and how we intend to accelerate growth, and we'll have an opportunity for Q&A. And John Blanshard, our new Director of Operations; and Mike Keaveney, our Director of Land and Development, will join Rob and me in answering your questions. 2021 was a year when this company continued to grow despite the many challenges of the pandemic. We delivered 6 new schemes, which is a record year of delivery for us. And this slide identifies 4 of the new schemes. The quality of the homes that we are delivering is exceptional, and that's certainly what our customers are telling us. They value quality homes and they value good customer service. For the last 18 months, understandably, everyone has been focused on rent collection and occupancy. Our rent collection has been high at 98%. And at the half year, I estimated that we would be at 95% occupancy by the calendar year-end, and that's considered to be stabilized. I'm pleased to say that at the end of October we had already reached 95% occupancy. And this was through a combination of investments we made earlier this year in our own in-house leasing team and our technology, enabling us to respond swiftly to the rebound in the market. Our operational PRS portfolio is now GBP 2.1 billion, which represents almost 70% of our portfolio. And we delivered 1,304 new PRS homes into our portfolio within the year. But importantly, we have over 8,000 future homes in the pipeline. We have more than doubled our net rental income since the start of the strategy, and it's set to more than double again. Establishing scale is important to us as a business. It enables us both to enhance returns to shareholders. And importantly, it also enables us to enhance our offer to our customers and to all our stakeholders, and that is why we're focused on growth, driving net rental income and dividend. Our robust performance has continued as we've been pursuing our growth agenda. We are committed, not just to the scale of our portfolio, but to the quality of our portfolio in order for it to endure for the longer term. And that is why we took the opportunity to further simplify the business by selling assets, which we didn't feel would deliver for shareholders in the longer-term into a strong market. This, together with our temporary void, resulted in our rents dipping slightly. Our net rental income was slightly lower. However, our passing rent is already at GBP 81 million, and that's 15% up, and puts us in a really good position for 2022. Our like-for-like rental growth was up 1%, reflecting our focus on retention, and it was 2% excluding incentives. Our adjusted earnings were up 2%, and our profit before tax was up 53%. We sold well into a strong market, and our sales profits were up 14%. Our NTA is up 4% at 297p per share. And this figure of course excludes the value of our technology, our pipeline and our reversionary surplus. So we've made great progress on our strategy. Our PRS portfolio is now 69% of our total portfolio, and is set to grow. Our shareholders have once again been supportive of us growing their business, and our September equity raise was more than 4x oversubscribed. We had a record year of openings, and the majority of these were delivered in the last 3 months, and they were leased up quickly and are now 91% let. In addition, we secured 4 new acquisitions and gained 2 new planning consents, and we launched 4 new pieces of technology to support our business grow at scale. Since the start of our strategy, launched just over 5 years ago, we have been clear that we wanted to change the face of renting in the U.K. Our purpose is renting homes and enriching lives. Our leadership of the sector involves us leading on responsible business practices, which is why I'm highlighting here just a few of the actions. Like most businesses, we have published our Net Zero Carbon pathway commitment to helping people live a greener life. 84% of our electricity is renewable. And for residential, in 2025, all residential rental properties must have an EPC rating of C or above. 85% of our PRS properties have an EPC rating of C or above, and we are creating plans for the others. Our WalkScore on average is 89 out of 100. And this year we delivered 183 affordable homes as part of our program. And Grainger Trust, our affordable housing arm now has 878 operational homes. Through our community engagement plan we organized over 550 community events, many celebrating diversity and inclusion and designed by our employee-led diversity and inclusion network. I am pleased that this work has been recognized by many awards and endorsements from the EPRA Gold Award to our Prime rating on the ISS ECG (sic) [ ISS ESG ] assessment. But I'm particularly proud that we were given an A rating by GRESB Public Disclosure assessment and were the highest scoring U.K. residential company. The strength of our business and the foundation for accelerating our growth is based on our operational model. It differentiates us and it gives us a key competitive advantage. And this year, we have invested further. Outlined here are just some of the key actions. We originate our own products and have 13 projects on-site and we collaborate with our operations team to ensure that our homes are great. We've invested in our operations team, creating our own in-house leasing team and new customer service desk teams, and we've embraced new technology. We undertook almost 6,000 lease renewals or new lets during the year, and this operating platform is scalable. These new teams mean we'll be able to drive higher returns. And in our investment team, we are focusing on long-term returns, and we've delivered GBP 108 million of asset recycling, and we've used slightly lower occupancy to undertake refurbishment programs to ensure a quality portfolio fit for the future. We increased our direct letting capability invested in technology, enabling customers to complete their lead-to-lease journey seamlessly in a digital environment. We launched a new resident service team in Newcastle, servicing customers who do not have access to an on-site resident service team member. And the investment we made at the start of the year puts us in a great position to capitalize on the lifting of the lockdown in Q4. Over the summer we dealt directly with 10,341 new inquiries. We brought and settled in 3,290 new families and 1,510 moved in between July and September. We have 3 further openings, 513 homes, and our customer satisfaction increased. 82% of all reviews from PRS customers were 5 star. This platform and its unrelenting focus on operational excellence, quality product and swifter leasing has led to high lease-up, high rent collection and better customer satisfaction. Our new homes are special, and what was a more subdued market, they all let up quickly. And as a reminder, in our underwriting, we allow a year to 18 months for lease-up. The lease-up of these schemes has been record-breaking. The new opening in South Hampton fully let in 3.5 months. The Forge, which is our first scheme in Newcastle, we bought in partially let, it's now fully let. The Filaments in Manchester, we launched in March, is 376 units, and we would normally have allowed 18 months lease-up, that's now 93% let. Windlass in Tottenham Hale is 108 homes. Launched late summer. That's now 73% let. And the Headline in Leeds, which is our record breaker, 242 homes launched in August and already 95% let. And then we have Apex Gardens, which is launched late summer, 163 homes, and that's 61% let. The speed of lease-up is explained in part by the quality of our product at the price point. All great schemes represented the increased pace of delivery in our portfolio. The balance of our new openings by numbers is more weighted to our strong regional cities, and we will continue seeking to maintain that balance between London and the regions. Our pipeline delivery is accelerating with GBP 3.1 billion of operational properties and a further GBP 1.9 billion in our pipeline. And of that, just under GBP 1 billion is in our secured pipeline, and GBP 947 million is in our planning and legals and our joint venture with TfL. The pipeline includes the new scheme secured this year in Bristol, Derby and London, together with the planning consents achieved within our TfL joint venture for 618 homes. And you still might have seen yesterday that we secured 2 new deals in Exeter and Sheffield. So to summarize the highlights, a strong financial and operating performance. Our platform is delivering. Our portfolio is strengthened. Our pipeline is growing, and we are leading the sector in driving responsible business practice. And I'm now going to hand over to Rob, who will take you through the financials.

Thank you to you, Helen, and Good morning to everybody. I've been with Grainger for 10 weeks now, and it's really great to be on board. And I just wanted to start by saying what really attracts me to the business was the strong growth story, the strength of the pipeline, the platform and the team, all of this in a market with strong growth fundamentals. And since joining, I've been so impressed by all of these elements. I visited many of the sites now, and the quality of the products for the price point really is superb. With the growth that we've got ahead, I think it's a really exciting time, both for the business and for me personally. It's also great to see so many familiar faces here today. And if I haven't had the chance to meet you yet, I look forward to meeting you soon. So today I'm going to cover off the key financial highlights. But given the accelerated momentum that we saw, particularly in the final quarter, I think it's also important to recognize where the business stands today. So I'm also going to give you some color and some understanding on how we're seeing the year ahead. We've delivered a robust set of results in the year that's seen numerous disruptions, particularly with lockdown in the first half. Net rents reduced by 4% in the year. That was particularly impacted by disposals and also the temporary impacts of the pandemic. Passing rents at the end of the year were up 15% to GBP 81 million on the FY '21 reported level. That's driven by the significant delivery of both pipeline and lettings, which I'll come back to. Adjusted earnings were up 2%, reflecting a strong delivery of residential sales in the year. Given the positive outlook for both rents and earnings, we've maintained the total dividend for the year. The dividend per share reduced by 6%, that reflects the impact of the placing in September ahead of reinvesting those proceeds, but it will revert to growth next year with the growth in rent. Profit before tax was up 53%. That reflects valuation growth from yield shift, from scheme lease-up, the performance on disposals and also strength in the residential market. With this, our total property return accelerated to 7.5%. EPRA NTA was up 4%, and TAR grew to 5.5%. The balance sheet remains in great shape. LTV is at 30%, that's slightly down on last year, and that's before reinvesting the proceeds. Overall, we've delivered a robust set of results given the numerous challenges. And the business is well placed to grow in the year ahead. Turning now to the income statement. Adjusted earnings were up 2% in the year as the growth in residential sales profits more than offset the temporary reduction in rent. We prioritized occupancy during the year through the use of rental incentives. We haven't previously used incentives, but given the markets earlier in the year, we offered a limited initial rent-free period. So PRS like-for-like growth would have been 1.6% if we excluded those. By the year-end, the strong performance in lettings from the summer meant we've driven occupancy back up to 94% ,and rising to 95% at the end of October. So we've stopped using incentives now, and we're well-placed to return to prepandemic rental growth of around 3%. We also saw little variation in both rental growth and occupancy between London and the regions, with a slight like in London recovery. Stabilized gross to net was 25.9%. That reflects our strong cost control, and that was despite the additional costs of the pandemic. We've continued to deliver a strong sales performance with residential sales profits up 14% in the year. And looking ahead at our sales program, we continue to see a strong pipeline of disposals going into FY '22, and we expect to make a similar quantum of sales in the year ahead. Turning now to movements in net rental income. Net rents was GBP 3 million below the prior year, that reflects disposals and also the temporary reduction in income. Disposals and delivery of new PRS investments in the year broadly offset each other. Like-for-like rental growth of 1% was muted given the focus on occupancy. The temporary impacts of lockdown and voids accounted for GBP 5 million reduction in rent. So overall, the net rent for the year was GBP 70.6 million. However, our passing rents at year-end was already substantially higher than that at GBP 81 million. The sharp recovery in occupancy over the summer added GBP 6 million, and we're now operating close to normalized levels. The annualized impacts of lettings on our new schemes have been deferred to GBP 5.5 million. So this takes us to net rent of GBP 81 million going into the new financial year. That's over 15% on the FY '21 reported level. For those of you looking to model next year's rents, I've included some further guidance for you here on this slide. So taking this GBP 81 million as a start point, you'll need to add the remaining GBP 3 million of rents at the FY '21 pipeline unit still to let along with an assumption of rental growth. FY '22 pipeline deliveries are again weighted towards the back end of the year. And so they'll only have a minimal impact on FY '22 reported rents. And then finally, I'd expect FY '22 disposals to be broadly in line with FY '21. So putting all of this together, we expect to deliver strong growth in net rents next year, assuming, of course, the market conditions remain stable. There's a lot more detail here than previously presented to help the understanding of our valuations. Overall, we delivered valuation growth of GBP 142 million in the year. That's up 4.5%. The ongoing delivery of our strategy means that PRS has now grown to 69% of the operational portfolio. PRS valuations were up 3.4% in the year, the majority of PRS assets being valued on a rent and yield basis. Growth was driven here through the delivery of our pipeline and the lease-up of our new launches, together with some yield compression of around 10 basis points in the second half across prime regional centers. ERVs grew by 1.4%. Regs have now reduced to 31% of the operational portfolio. And as you can see, the majority of our regs are based in the London and the southeast, where, of course, HPI has been more muted. Regs were up 3.6% in the year, driven by strong HPI growth, particularly in the regions. This slide sets out the EPRA NAV measures, and we consider EPRA NTA the most relevant measure for Grainger. The reversionary surplus in our portfolio is excluded from this measure, and it's still significant at GBP 265 million. That equates to around 36p per share. The 4% increase in the EPRA NTA to 297p is driven by the strong valuation growth. EPRA NTA was impacted by a GBP 34 million increase in deferred tax. That reflects the announcement earlier in the year of the increase in corporation tax to 25% from 2023. This business has always had the ambition to convert to a REIT, and the tax rate is one of the relevant factors, together with accelerating our PRS pipeline. And with this, we envisage conversion over the next 4 to 5 years. In addition, a new IFRIC has been issued in the year, giving guidance on accounting for development costs on software taken as a service. This is particularly relevant for us given our desire to lead the sector in technology. There's now no longer a choice to capitalize. These costs have to be expensed due to this guidance. And therefore, we've applied a change in accounting policy to reflect this external change in accounting requirements and restated our results. This exceptional item does not impact our cash, adjusted earnings or NTA, given these intangibles were already excluded, but it does impact our EPRA net disposable value by 4p. And I've included a slide in the appendix giving further details on this. This chart shows the key movements in NTA over the year. Rental income and valuations continue to be the key drivers of growth in our NTA. With this, our EPRA NTA pre the one-off deferred tax increase was up 6% to 302p, and up 4% to 297p after absorbing this impact. Our net debt closed the year broadly stable at just over GBP 1 billion. Our operating cash flow remained strong at GBP 128 million. And we continue to invest heavily in our pipeline with GBP 348 million invested during the year. We continue to maintain our prudent approach to funding with the recent equity placing supporting our pipeline of new opportunities. And we've made good progress in committing the funds in the raise, over $236 million committed to date. We're focused on maintaining a low-risk, flexible capital structure, supporting the business and its growth ambitions. LTV remains in the low 30s, reflecting our recent equity placing. We maintain our approach to having our committed CapEx fully funded. Were we to include this committed CapEx, LTV would be 40% within our stated 40% to 45% range. Our cost of debt remains consistent at 3.1%, and our weighted average debt maturity is 5.6 years. We've got no significant debt maturities in the year ahead, with our next maturity, GBP 50 million, in November 22. During the year, we also achieved a corporate investment-grade rating with Fitch, confirming the strength of our capital structure and the balance sheet. As our PRS portfolio continues to grow, we'll further align the debt structure with the growth of these investment assets, diversifying our sources of funding and securing longer-term debt. We're in a great place for funding our ambitious growth strategy. Given the current focus on inflationary issues, I've set out here what this means for Grainger across a number of different areas. Overall, we've got a good degree of protection in place. As is clear from the chart, historically, rental growth is very closely to our general cost inflation, with the impact benefiting the business. And we always seek to fix our pricing on developments. And we've got a good degree of protection in place here with 13 out of the 16 of our secured pipeline projects now under fixed-price contracts. This slide shows the progression of our passing net rent based on the delivery of our pipeline. Recurring income is going to form an increasing component of our earnings as we continue to build out our pipeline in line with our strategy. FY '21 reported rent was GBP 71 million. Overall, our secured pipeline growth is positioned by over 90% to GBP 137 million. That reflects securing Merrick Place in the period and the removal of Seven Sisters as well. We have a clear line of sight of this delivery of this increase as it's all fully funded and secured. The opportunities in our planning legals budget -- bucket, should I say, and TFL, give us the potential to increase net rents by a further GBP 41 million. As net rental income more than doubles over time, so will the dividend, as our policy is to distribute 50% of our net rents by way of dividend. So putting this all together and to summarize. We've delivered a robust performance this year, and we've seen our momentum further strengthen over the summer, giving us strong rental growth going into FY '22. We've capitalized on the positive sales market with disposals, and we've got a strong pipeline of sales going into next year. Our liquidity and our balance sheet are strong, and that gives us the firepower and the flexibility to continue to grow our PRS portfolio. We're going into the new year with strong momentum, a strong product offering, an exceptional pipeline of new assets and our best-in-class operating platform. So we're in a good position to capitalize on our near-term opportunities, together with being well-positioned for longer-term growth. And with that, I'll now hand you back to Helen.

Thank you, Rob. In this section I'll update you on what's happening in our market, which is attracting a lot of interest and how with increased competition we're continuing to be successful in sourcing new product. So firstly, our investment case. It remains strong. It's no surprise that after the turbulence in other real estate sectors that the private renter sector stands out for its resilient returns. It's low risk, and it has lower volatility. It has significant growth potential. And although there's been a lot talked about this sector, there are still only 64,000 operational purpose-built PRS homes in the U.K. Supply is constrained by access to land and planning and skills. And as Robert said, there is a long-term correlation with rents and wage inflation. The government has been supportive. They realize the importance of build-to-rent in increasing housing supply and in leveling up. And Grainger is in a great position to benefit from this strong investment case. We have the first-mover advantage, and we are the market leader, and we have an integrated business model. We have a leading operating platform and a proven track record. And we have a strong track record in working with the public sector, which is important as the public sector land bank is attractive. And we expect this government to urge its departments and local authorities to bring forward public sector land for housing. The sector has great structural fundamentals, but also near-term growth prospects. The structural undersupply is highlighted here, bottom right. And professional landlords only make up 3% of the market, but build-to-rent is only 1.3% of the market. The English Housing Survey is showing that renting continues to grow across all age groups, but particularly older age groups. Buy-to-let on the other hand is diminishing, with greater taxation on individual landlords is just one of the reasons, but also renters' flight to quality and to greater levels of service is predicted to continue. And all of this is set against a housing market with a fundamental undersupply. Now turning now to the immediate trends. The leasing market is driving growth and has strengthened rapidly. The region's time-to-lease responded quickly with London following but accelerating more quickly. At our Capital Markets Day last year, we illustrated the strength of cities in the longer term, and the home track market report underscores the sharp increase in demand for city markets. It's not a surprise that with the resilience and attractiveness, that's driven demand and new entrants. This in turn has driven yield compression, up to 25 bps in prime regional centers. And perhaps most interesting is the Savills growth forecast, which shows 5% to 6% rental growth in the near-term and 6% in London. Now it's worth remembering that Grainger's rents did not fall during the pandemic. Last year we were positive 3%. And this year we're at 1%. So a strong bounce back in rents is not expected. But we do expect rents to return to the circa 3% rental growth mark. Our operating platform differentiates us, and it hits the foundation for our market-leading position. We're close to our customer. Our Insight Programme informs our operational decision-making. Our CONNECT platform is delivering efficiencies and insights and enhance customer services, and, importantly, scalability. We've invested in speeding up our response, improving quality and amenity. And all of this is driving brand loyalty and differentiating us. Since the start of the strategy, our in-house research and data has always informed our investment decisions. You're probably very familiar with this slide, the 18 economic data sets we look at to establish areas of high-growth and supply and demand imbalance. We're very clear on where we want to invest. And probably one of the most popular questions I get asked is how have we achieved this growth in a relatively short space of time, and this slide explains it. We are dynamic in our sourcing. Unlike most of our competitors, we have many routes to market. And this is because in addition to our investment team, we have an experienced in-house development and land team. And so here are just some of our routes to market. In our forward funding, we work with a range of experienced developers who usually own sites. We inform the specification and we monitor delivery, and then we fit-out the apartments and the amenity space. And our recently announced Merrick Place, London and Becketwell, Derby, are good examples of this route. In Newbury we are directly developing, and we assembled the land in partnership with the local authority and network rail, and we undertake the full development process. We acquired sites with and occasionally without consent. Our recent acquisition in Sheffield, adjacent to Brook Place scheme is a good example of this. Berewood, we leveraged off our strategic land bank and directly developed, and we have our joint venture partnerships where we are partnering for the long term. And we're often selected here because we can take a much longer-term approach than, say, an investment fund with a defined life. We acquired through corporate and portfolio acquisitions. Our GBP 520 million GRIP acquisition was an example of this. And perhaps the most straightforward acquisition is of a stabilized income-producing building. And an example of this was The Forge in Newcastle. However, this was brought off market. It involved a series of complex corporate structures. And so it perhaps wasn't that straightforward. But with only 64,000 homes currently built and the attractiveness of the sector, I don't anticipate that we'll see many schemes trade in this way. This year we deployed 4 of these routes to bring forward 10 schemes and GBP 236 million of which were supported by our September equity raise. So in summary, this business grows stronger with each new scheme. When I joined Grainger, our PRS portfolio of rental homes was GBP 200 million. Today, we have GBP 2.1 billion, and it's the majority of our business. And we have really good visibility on how we grow to GBP 4 billion. As you can see, there is strong momentum. We've continued to deliver strong performance. And it's been a great year of delivery and lease up. We're ahead of our strategy. Our pipeline is expanding, and this business is growing. Our best-in-class operating platform will deliver compounded earnings growth, and our new deliveries will accelerate rental growth into next year. Our decision to focus on a market with strong fundamentals and to know it and to lead it is delivering growth for shareholders. Grainger is delivering for shareholders, customers and communities. And we are now accelerating into our next stage of growth. Thank you.

I'm now going to invite you to ask questions, and I'm going to be joined by Rob, our CFO; Mike Keaveney, our Director of Land and Development; and John Blanshard, our Director of Operations. Now we'll be taking questions from the room. And for those dialing in, please send any questions to Kurt Mueller. His details are on the website. And we'll either answer them now or we'll get back to you. So who's got a question? Miranda?

I have just 2 questions. Firstly, what about the regulated? Where do they sit? And I'm guessing obviously they're not as good as that. And what are your plans to improve them? I know obviously you're selling them as well. So you've got to balance that. And then the second question was just on the developments. You highlight that 12.8% increase in the year. Can you give us a feel for what kind of profit on costs you're achieving on the developments or IRRs at the moment?

Okay. I'll take the first one. I'll probably ask Rob and Mike to take the second one. In terms of our regulated properties, the regulation that's coming in requires all new lets to have an EPC rating of C or above. And so it doesn't apply to our regulated properties. However, we do assess them. And as you say, in most instances, we sell them when they become vacant, so we're not reletting our regulated properties. And we have, over the years, invested in them. Our average age for residents now is 78. So doing major construction works to improve them is often something that's resisted by the occupiers, but we do work with them in terms of improvements. So we offer things like double-glazing insulation, that sort of thing. Second question, which was around development returns. Do you want to start, Rob, on that one?

Yes. So overall, in terms of our projects, we're typically targeting IRRs of around 7%. And when you look at the development, it depends on the nature of development. So by direct developing typically we're making profits on costs of around 10% and obviously forward-funded our, in some ways, a form of acquisition for us and have less risk. So the returns are obviously a little bit lower on those. Therefore, the IRRs are what we're really focusing on, the 7%.

Chris Millington at Numis. Yes, just to follow on from Miranda's question before. Have you done any asset [Technical Difficulty]

Yes. It's a very small number. Remember, the majority of our buildings have been built recently. So they're sort of -- and the current requirement, so it's 85% of our portfolio. So it's less than 15%, in fact, that we'll do further work on. And at the moment, there's a requirement that you spend up to 3,300 to meet that criteria per unit. So you can see it's pretty de minimis in terms of the overall scale. We do expect the government to increase that, but not more than GBP 10,000 per unit. And some of them, it's very, very straightforward. So it's light bulbs and small changes. So it's -- overall, it's going to be between GBP 3 million and GBP 10 million.

Next one just on regional trends, London, like the regions coming back, can you just give us a feel as to what you're seeing at the moment and whether or not you'd think London catches up from a valuation perspective with the regions during the course of this year?

Yes. I mean, London is obviously quite keenly valued, but it is the best rental market as that slide shows. In terms of the -- in terms of growth, I think the London market has come back extremely strongly. And I would expect in the longer term London will continue to outperform the regions. Yes. So we've obviously, in terms of HPI, we've seen a lower sort of HPI across London, but there have been reports out like Frank and Savills have put reports out that are showing that there is a potential London bounce on house prices.

And the final one, I mean, the stats you gave about purpose-built, build-to-rent is astonishing how low it is as a proportion of property. Have you got any stats on where the overseas markets are on this? It's probably a slightly unfair question given your U.K. focus, but maybe just some anecdotes there.

Chris,, we'll sort of come back to you. We are the -- we have the smallest rental sector, professional managed rental sector in the whole of Europe. So it's -- so we are very, very small. So we've got 5 million rental homes and only 64,000 of those are purpose-built. We really are at the foothills on this one. And obviously, the U.S. is higher than Europe. But compared to Germany, we're sort of -- we're obviously, it's a very, very small proportion.

And do you think direct development, based on those returns you talked about before, Rob, do you think it will increase as a proportion of developments going forward?

I think the -- one of the things about all the maturity of the business and the scale of the portfolio that we can look further and further out, we're really clear on where we want to invest. And so buying sites, as you've seen us do this week in Exeter and the site adjacent to us in Sheffield was something we wouldn't have done as a business a few years ago, whereas now we're actually stepping up that activity. Mike, I don't know if you want to add on that because you've got strategic land team that looks at sites in the longer term.

Yes, sure. So we like to do more direct funding [Technical Difficulty] fund gives us access to the market quickly. It also gives us access to sites that have already been through filtering. So we have to be -- we are out there looking for sites constantly. We have been for years. And it's about finding sites where we can add value at the right sort of level. And it's really important. All of our underwriting is prudent, and we're careful about what we pay for land.

Sander Bunck from Barclays. Just -- yes. Sander Bunck from Barclays. Couple of questions. First...

Sander, we haven't done it on purpose.

So, yes, couple of questions [Technical Difficulty]

I can hear you. Sander, you have a go and I'll repeat it for the -- that's good.

Maybe this is going to work. Okay. Well, last time. Good. Couple of questions. First one is basically on capital value growth going forward. I mean, obviously, we're reading something in the newspaper every day that there's a new build-to-rent platform being established. There's a huge amount of weight of capital looking to be deployed. You saw some yield compression in the second half of around, what is it, 10 basis points, London still slightly lagging. With that, is there more to be expected from that? Or do you think that yields are expected to remain broadly stable from here?

Yes. I think in a way you would expect yields to compress because of the performance of the sector over the long term. It really has delivered for the -- for investors. You're right, we saw 10% bps in terms of the -- in terms of our regional portfolio. I suppose if you look across taking Chris' point on the European, European sort of investment yields are significantly lower than London and the regions. So I think we will see further yield compression just because of the 2 things that you said, the volume of new people coming into the market, the weight of money attracted to the sector and the performance of the sector.

[Technical Difficulty] pipeline. What is the progress there? I think the development spend of GBP 600 million has been broadly unchanged. Has anything been spent on that just yet? Or how is that basically going?

Okay. So we have -- I'm going to hand this one over to Mike who runs that joint venture. But we have got over 1,000 units now through the planning process. Mike, do you want to...

Yes, sure. So this year was good year of momentum actually with TfL, so built around very much part of their strategy. So 3 schemes of planning consent this year, 2 more next year, we think. And we are actively looking at future schemes with them on other sites across London. As you'll know that they have plans, but more housing and income from their site. So it's going well.

Great. So spending is expected to start this year?

So in terms of -- I've got your problem. In terms of that GBP 600 million, so we're -- so we've moved on 3 of those schemes into design and procurement. So the actual expenditure probably isn't -- the main expenditure isn't probably till end of next year when it really starts and we'll be on site.

Understood. And last one, sorry, this is slightly following up on Miranda's questions on the profits on the development pipeline. You mentioned yield on cost of roughly around, you mentioned 10% or so, which sounds pretty high, but IRRs of around 7%. How does that match up? Because I would expect that IRRs are a lot stronger. If the yield on cost is 10%, you have market rent growth of 2%, 3%, then your IRR should be way ahead of that. So just kind of a clarification on that, please.

Yes, it's internal cost. Profit margin.

Okay, so that's the profit margin, fine, okay. Okay, fine. Okay, cool.

Yes, yes.

Any other questions?

I have 1 e-mail through. I'll just read it out. So we had a question e-mailed in from Kieran Lee from Berenberg. 2 questions actually. The first is regarding the residential property development tax and how this will impact Grainger? And the second is, is there any difference in liability for on-balance-sheet development or forward funding? What is the anticipated impact to Grainger if caught within the scope of the tax? So a sub-question to the first.

Yes. So the -- for those that are not aware, the residential property development taxes really meant a tax which is in design at the moment, which is to try and recoup the costs of cladding. The really good news for our sector is that the sort of purpose-built build-to-rent providers are not going to be captured by the tax. That was something we worked with the government on for quite a long time to explain that. Of course, if we create anything that's got a problem in it, unlike the house builders who would normally pass that on to homeowners, we obviously continue to own the property, so we fix it ourselves. So we're not drawing on the cladding fund, if you like. So therefore, we shouldn't pay for it. And that argument seems to be accepted, and the bill traveling through at the moment does not capture it. And so it makes no difference whether it's on or off balance sheet. It's not captured. Any other questions? I'm conscious that some of you want to be elsewhere. And so once again, thank you for joining us. If anything else occurs that you'd like to ask us about, we'll be around for a little while. And thanks once again, and really great to see you. Thank you.