Watkin Jones Plc (WJG) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen, and welcome to the Watkin Jones Plc investor presentation. [Operator Instructions] The company may not be in a position to answer every question it receives during the meeting itself. However, the company will review all questions submitted today and publish responses where it is appropriate to do so. Before we begin, I would like to submit the following poll. And if you could give that your kind attention. I'm sure the company would be most grateful. And I'd now like to hand you over to CEO, Richard Simpson. Good afternoon, sir.

Good afternoon, and a very warm welcome to this presentation on our annual results, which finished on the 30th of September 2022. As I've already been introduced, but no harm double tapping. My name is Richard Simpson, I'm the Chief Executive, and I'm supported by Sarah Sergeant, the Chief Financial Officer. What we're going to do is we're going to run you through a few slides, which look at our financial performance for that financial year. And we'll also endeavor to bring you up to date to the situation, the trading situation, operating situation, which we find ourselves in at the moment. I would imagine the -- this review of the pack will take between sort of 30 to 35 minutes. And therefore, we're leaving plenty of time for Q&A at the end, which I think is really what this is about to hear your thoughts, hear your questions and give us an opportunity to respond to those as best we can. So turning to the presentation then. The agenda is pretty self-explanatory. We'll look at the summary for our financial year '22. We'll then do a little bit of a deeper dive into the numbers themselves, and we'll then turn to the outlook and thinking about the development market and the market -- the underlying market for student accommodation and also build-to-rent before finishing up by thinking a little bit about ESG, our approach at the moment and also how fresh our property management business is getting on. As I say, we will finish up with plenty of time for Q&A. So therefore, turning to the first one in terms of the outlook and summary. I think the best way to characterize FY '22 is resilient and adaptable in the first 11 months. During that period of time, I think the business cope well with a fair bit of volatility build cost inflation, movement within asset prices. But fundamentally, a very strong demand for build-to-rent and purpose-built student accommodation from the investment universe. And then, of course, month 12 really surrounded or revolved around the mini budgets. And that's where we had 2 planned forward sales that were actually very well advanced and got caught up in the teeth of the storm there, and both of the purchasers decided to pull out citing material uncertainty at the time. But in terms of outlook, we have GBP 700 million worth of forward sold revenue to come over the next few years. And of course, that's forward sold because of the sales we made principally last year and the year before. And therefore, just the time it takes to develop those properties out, we have that revenue contractually secure. So that's very important. But we also have GBP 800 million -- circa GBP 800 million of revenue to come on consented pipeline principally for student accommodation consents, which we are now actively marketing out there. And I think one of the interesting characteristics here will be that we expect forward sales to resume in our H2 and so very much to see that being second half weighted. There's a few comments on there about margins, but I won't pick those up now because I know Sarah is going to come to those in a second. So just turning over to FY '22 results. I'm going to hand over to Sarah.

Thank you, Richard. I'll just do a quick overview of our results for the financial year ending September '22. So overall, I'm pleased to report that results were in line with the update that we did to the market at the beginning of October. Revenue of just under GBP 407 million, representing very small decline from the prior year position, and this is really due to the Q4 sales that Richard has talked about, which didn't close as we had ended in September. Our gross margin was at 16.6%, again, very slightly left in the prior year, impact of the higher level of land sales that we had in the prior year. We take these to revenue at a lower margin than [indiscernible] following development works. And operating profit at just under GBP 55 million. That included a profit on disposal from the sale of 2 student assets, which we were holding on our balance sheet. Obviously, [indiscernible] that flowed through to EPS and EPS was slightly down on the prior year, we did have a small impact from a prior year tax adjustment in relation to some remedial works, which were disallowed. Pleased to report a dividend of 4.5p, which would be paid to shareholders very shortly. We had [indiscernible] again, slightly down on the prior year because still represent a very, very strong position. I think there's one key point on these slides is that they are reported on an underlying basis. This excludes the exceptional charge of GBP 30 million we took in the year for our provision of [indiscernible] to be done in relation to the Building Safety Act. Just following on to balance sheet. The key points here are really the strong growth and net cash position that we finished at the year-end. As I said, we have disposed 2 of our leased assets and therefore, you see a corresponding reduction in the asset value and also the liability value for those. I think finally, we did have a level of build up on our balance sheet. This was in relation to a couple of pieces of land that we acquired. And indeed, there's 1 site in Bristol, a very, very strong quality student scheme, which we are building up, where we have [indiscernible] to the University of Bristol. From a cash flow perspective, that really represents -- the outflow represents that buildup of land and working progress that I just referred to. We obviously also had a corresponding [indiscernible] borrowings as we drew down on our credit facility in relation to the purchase of these pieces of land. But overall, as we look forward and we look into at '23, you can see strong liquidity position with our gross cash and with our available facilities. From a segmental perspective, and this slide here shows the breakdown of revenue between the different segments of our business. I think the key point is really to point out that a growing contribution from build-to-rent. So you can see we reported revenue of GBP 191 million for built-to-rent that represents 68% -- sorry, that represents a 38% increase. The only other really key point here is Fresh. That's our accommodation management business had a record year of revenue, recorded revenue of just over GBP 9 million. Just moving on to gross profit. In terms of our segmental gross profit. We recorded a margin of 17.2% for BtR, that's very strong and obviously ahead of our target margin of 15%. And as Richard said, I'll come on and talk about the guidance that we've given you for margin for '23 and '24 in a couple of slides time. I think the kind of key point here is Fresh, really good increase in the gross margin there to 65%, and that's due to the level of occupancy that's increased in the student buildings that the Fresh manages. And just the final slide from a numbers perspective. Given that the position that we thought we would be in the half year and then the subsequent update that we gave to the market at the beginning of October. I thought it was important to give a bridge from where we thought we were going to be to [indiscernible] full year delivery of GBP 55 million operating profit. At the half year, as Rich said, we did have confidence in achievement of our full-year number. And obviously, that was quite significantly impacted by events in September. You can see here that the building blocks. So if you look at the right-hand side of the table, you can see that impact in yellow from the delay of the 2 forward sales. So we had 1 forward for sale in Bristol and 1 in Belfast [indiscernible]. And you can see that corresponding increase on our profit. We did also experience some margin pressure on the last forward sales, which we did complete in H2, but equally, we had a strong profit from the disposal of the 2 leased assets and obviously then managed to mitigate some of that position to result in the GBP 55 million operating profit. I'll now turn to talk a little bit more about '23, what we're seeing. And then equally, that outlook that we've given to the market both on revenue and margin. So in terms of '23, we're guiding to a revenue number of about GBP 550 million for this financial year. And this assumes that the forward fund market will return to more normal demand levels in Q2. So that puts it [indiscernible] that that's Q2 of the calendar year, not Q2 of our financial year. The top table really shows the building blocks to that revenue forecast. You can see in green, this is a revenue that we've already forward sold. That's on-site contractually secure and being built out at the moment. The balance of the revenue, so that's GBP 250 million comes from new forward sales where we have a very, very strong secured by pipeline. As Richard said, that has an overall revenue value, about GBP 700 million. And obviously, we've got assumption of forward sale elements coming through there. I guess it's key to note here that we aren't assuming any of those forward sales happen until the second half of our year. I think the other point is that we've presumed there will be very little construction revenue in relation to these forward sales. It will just be the land element, and therefore, that gives us a little bit of flexibility about the timing of that. From a profit perspective, we're guiding to an operating profit of similar to financial year '22. So that's about GBP 55 million. And it's key to note that, that does assume prudent investment evaluations with obviously a reduction in the selling price. And that's obviously in line with some of the forward sales that we completed in the second half of financial year '22. And our cash flow will follow its normal and annual profile, which is where we spend down on cash during the course of the year, from a working capital perspective, obviously, to finance our overheads, tax dividends and interest and then rebuild as we come into the end of the financial year as we complete the new forward sales. Having -- finally, the other key point on this slide is we have taken the decision just to slow down our affordable lead housing business really as a result of the state of the market. We felt it was important to probably stick to the knitting while we focus on the recovery of the more established and equally the higher-margin student and BtR sectors of our business. And just to give a bit more color on the -- on our consented pipeline, as we said, that this recorded the total revenue of about GBP 800 million and we can -- that's about 8 schemes in total, very, very quality assets. And I think 1 advantage of us not completing any forward sales in the last few months is that we'd be really be able to work on this pipeline, bring it through planning and indeed get planning permission. And it's a very strong base for us as we look into '23. I mean just a couple of examples. We've got a fantastic student scheme in Stratford, really, really great location. And I think many of you are aware that Stratford as a place has had such a significant rejuvenation since the Olympics in 2012, and again, very rare to get planning in such a sought-after location. I think we've got a similar scheme in Bristol. We've got a number of student schemes, which are coming through. And I guess it's key there because we have a -- the city itself has a real, real shortage of student accommodation and equally a student accommodation, which is coming online in the next couple of years. So overall, very based on consented pipeline, which we are out in the market with at the moment. Just a little bit on cost, obviously, as we phased into in the market and obviously kind of on back of the trading update that we gave at the beginning of October. It was important to make sure that our business was fit for the future as we came into slightly more in certain times. And we conducted a very, very quick review and [indiscernible] program. So we took out about 40 heads, that's about 10% of the Watkin Jones workforce, excluding Fresh. And this will give us annualized savings of about GBP 3 million to GBP 4 million. And obviously, those savings are starting to come through now as everybody impacted left the business before Christmas. I think the key point here is that cost was mainly -- or the people out were mainly in the support functions. We're, obviously, very keen to make sure we protected the development and the divestment teams, which are so integral to the future success of the business going forward. And just looking forward to gross margins. So we are guiding to a blended gross margin of 12% to 14% for the next couple of years. I guess the key factors behind that are, first, the impact of the price reductions on what we already have forward sold in the second half of last year. We've obviously made -- we've obviously kind of kept those valuations intact as we've gone through the pipeline. The third point is this pipeline is in relation to land at historical prices. So I think you're aware that we hold very little land on our balance sheet, but we do hold it under [ auction ], and therefore, we have a contractually committed price to work through the land. And then finally, we have a small impact from development wrap projects. These are projects we do. For example, we're doing one for LNG in Cardiff at the moment, which do come through a lower margin because we don't hold any interest in that. So those are effectively the drivers behind having slightly lower blended gross margin. As we look forward, we very much see a route to recover our margins. And that's really, as we get a better price from land and we are seeing land valuations come down 5% to 10%. And we see the opportunity to rebuild the margin as build costs start to decrease. You're all aware, it's been a very, very strong inflationary year for build cost in the last year or so. Already we're seeing that inflation number coming down, not yet to deflation, but we expect that to start moderating as we go forward. And then finally, just a kind of summary of the resilience of the business. As Rich said, we have very good visibility of secured revenue. We've got GBP 700 million, which is forward sold and that will come through over the next 1 to 2 years, of which approximately half will be in FY '23. Secured development pipeline, which has held a realistic values. We've taken out a couple of sites which were unprofitable. We have a very strong capital-light model, and we are -- because of that capital light, we hold very little on our balance sheet, and therefore, we're not exposed to significant asset devaluation in a downturn. And our model is generally -- we've got 1 exception at the moment, but it's generally not to start on site without a forward funding deal in place. And from a liquidity perspective, a good strong cash balance that we finished at the year-end and obviously sufficient or significant headroom on our RCF facility, which will allow us to take advantage of attractive land acquisitions as we look at the opportunity in the market. So on that note, I'll hand over to Richard. He's just going to talk a little bit more about the progress we've made in development.

Thank you very much, Sarah. So as Sarah was talking about there, there is clearly volatility at the moment, and there is some uncertainty about valuations and pricing and certainly the outlook for those. So as a developer, what are we doing to try and get in front of that? Well, it's already come out that despite having a secured pipeline where the land price is fixed within the contracts. Clearly, outside of the contract, we can go back and proactively have discussions with vendors about potentially reducing those prices now they don't -- well, they don't contractually have to budge an inch, but commercially, that they might seek to agree a discount in order to have more certainty that we would go ahead and transact on the land. And certainly, those are -- those discussions are ongoing. But equally, where we're looking at the next wave of development pipeline, sort of new acquisitions in the market, it is a pretty attractive market at the moment and the sort of barrier sentiment, which persists. It is definitely leading to a reduction in land price. And we shouldn't forget that most of the land we buy are in town and city centers and other competitors for that Land would typically be commercial developers or maybe retail developers or maybe even hoteliers and all of those markets are pretty depressed at the moment. So we do see good opportunities at attractive margins, certainly back to our historic margins going forward. In terms of planning, we are looking to work with the local planning authority to tweak our planning permissions and look to maximize density and thereby maximize the value on them. And there is recent examples where we've had discussions successful with local planning authorities about putting an amended application in where we can perhaps get an extra floor that can make a pretty material difference to the value of the development itself and certainly can look to offset some of the drop in overall value which we have been experiencing within the residential sector. And then we've got the rent and operations, I mean, we shouldn't lose sight of the fact that the key hook for institutional investors to buy assets from us is exposure to the underlying residential sector in the U.K. And of course, that has been characterized over the last few years has been really strong occupancy and very strong rental growth. Clearly, all of us are aware because it is far from the -- it's sold and far from the news as to annualized rental growth within residential at the moment. It is strong. And of course, it's attractive, therefore, for owners of those assets, and therefore, it's attractive to institutions to talk to us about forward purchasing our development pipeline. And then Sarah has already covered build costs there. But clearly, the key point for us is that we are seeing a reduction in the rate of inflation, as you said, is not yet negative, but we expect actually materials potentially to go negative over the course of this year. Labor is stickier. But nonetheless, I think there is also scope for labor prices to come down too. So we'll turn a little bit more into the color of some of the points I've already made. And we can see here with the land side of things, land prices historically lags the market. But we are already seeing land prices come down, and we're already engaging with landowners about securing our next wave of development sites, as I say, at those discounts, which helped to contribute back to our historical target margins. Planning, again, these comments I've already made, we had a good -- we've had a good run actually over the last few years on planning. We -- without trying to tempt fate, we tend to get our planning commissions, various reasons for it. But I think -- I imagine one of those reasons is that we look in town and city centers and one of the very few places where there is quite clear government support and planning, it is exactly in those locations because they are looking to regenerate and breathe life back into those parts of towns and cities, which otherwise, perhaps, have gone a bit quiet over the last few years. And I think that is a sort of fairly reasonable tailwind for us as a business as we look to go forward. Perhaps have a little bit more visibility and confidence around planning than a number of other developers out there. I think the other part is that we've got a good long-term track record in not just security and planning, but then implementing and developing in a timely manner our developments. And we have a very large number of completed developments all over the U.K., where they are an important part of the local community, there are tenants, there are residents, they're being managed responsibly. And all of that is important when we then come back with a new planning application and that local authority is well aware of us from our previous work. As I say, it's all part of our brand. And then this point on build costs, again, which I've already covered, but there's just a little bit more detail there for you. But as I say, I think the key point here is that we are seeing build cost inflation reduce. And this slide and the next one actually look a little bit about what happened in September. And really what this slide tries to pull out is a comparison of the risk-free rate to residential yields. And you can see that the risk free rate is essentially the 2 lines at the bottom and residential yields is the purple or dark blue line at the top. And you can see how -- over the autumn of last year, how that gap closed materially. And of course, it is about the extra return investors get for investing in residential as opposed to just investing in gilts, which is important for them to think about investing in our sectors -- in the asset classes. And of course, what's really important, it's not just a straight comparison of yield to yield, i.e., the net initial yield you might generate from student or BtR compared to the risk-free rate. You also need to add in rental growth because rental growth is an important part of total property return. And what you can see here shown in a number of different ways for completeness is that if you take the net initial yield of residential and you add on rental growth and that is giving a pretty material and attractive premium to the risk-free rates. And therefore, the [ maths ] are working for institutional investors to look to continue to buy product from us. And that is why we expect the market for forward sales to return over the course of this financial year. Then just turning to the market review. Overall, we're seeing strong growth in demand from prospective students to come on study at U.K. universities. You can see a number of data points there. But essentially, we are seeing a pretty robust supply-demand imbalance. The very simple way to analyze it is that there's around 2 million full-time students in the U.K. And there's just under 700,000 purpose-built student accommodation beds either owned by universities or corporately provided which shows a pretty material gap and therefore, good scope to continue to increase supply within that market. And similarly, when we turn to build-to-rent. We can see that occupancy has been extremely strong, which has driven very attractive rental growth and actually projections looking forward are to remain strong, even though the expectation, of course, is for [indiscernible] inflation to begin to subside. And therefore, that is more about lack of supply and therefore, fundamental demand driving up occupancy and pricing. And then it's interesting, even though we are going through this period of volatility. I think really what's happened over the last -- certainly the last few years, but if we bring it forward to what's happened in the last few months is residential demand from tenants has remained elevated. And as I say, therefore, there's strong occupancy, therefore, there's strong rental growth. And actually, if you compare that to almost any other part of real estate. You can look at commercial -- more traditional commercial sectors, perhaps. You certainly wouldn't have seen that level of performance or that level of confidence about the future performance either. And so what we're certainly seeing is that increasingly, institutional investors are looking to recycle out of more traditional real estate into the residential sector. Now the only real way for institutional investors to access residential to get exposure is through student accommodation, and it is through multifamily build-to-rent. So we do expect over the medium to long term, once we're through this volatility for very strong demand to reestablish and in fact, continue to grow from those institutional investors. So I'm going to hand over to Sarah to look at Fresh.

Thank you, Richard. So just a very quick update on Fresh. I think Fresh is our accommodation management platform, which operates predominantly in the student space, but moving more into the BtR space, very strong operational expertise. So we have over 23,000 units or beds under management across the U.K. and Ireland at the moment, very successful from a retention perspective. So retention rates of 98%. Fresh continues to be market-leading and getting fantastic feedback, both from clients and from residents alike. And you can see on the slide just some of the great examples of the awards that Fresh has won this year. From an investment perspective, we've continued to invest in Fresh, and we see it very, very much an important part of our business. We've established a new leadership team with some excellent expertise in it. We've also done a systems update, and we've got a program, a platform called Yardi, which effectively gives both clients and residents alike access to all the information they need in relation to the scheme. And then looking forward, we really see great growth opportunities for Fresh. As I said, we see it very much moving into the BtR arena, has a number of BtR sites that it manages at the moment and many more in the pipeline. And there, we would look at doing a white label offer for example, where potentially the Fresh brand might not be appropriate. So very, very pleased with fresh. It's always offered very qualitative benefits to the Watkin Jones business, obviously, kind of enables us to be able to offer an end-to-end solution to our clients in terms of delivering a scheme which we then go on to manage, but equally qualitative. So Fresh has a very strong gross margin as we've seen earlier in the slides. And if I think about the margin guidance that I gave previously, that with Just for BtR and for student, we can add another percentage point on gross margin in relation to Fresh. So in summary, a great business, and we're looking forward to supporting it as we look into this year. Now I'm going to hand back quickly to Richard.

Perfect. Thank you very much, Sarah. So in terms of ESG, as you know, we've got our future foundations strategy here for ESG, which picks up planet, places and people. And you can see just a very short summary of some of the achievements or some of the things which we've been working on over the course of last year. I think it's fair to say that just like many companies, it's still relatively early days for us in terms of our ESG strategies, but I think we're making initial progress in line with what we'd look to do. I think perhaps for me, the key one is around Scope 3 emissions because that's where that's really your supply chain's carbon footprint, and it's about how do you sort of -- how do you change behaviors appropriately. And how do you change your methods of procurement, the materials you use and the ways in which you physically undertake construction on site to reduce that carbon footprint. And I think that's an important point for us to look to make further progress on. It is equally probably the -- one of the most difficult challenges within a sort of ESG plan certainly for a real estate developer, where, as I say, the majority of the carbon footprint really comes from our supply chain. Now the way to move into that is to start by benchmarking where we are today. And that's why we're working with an organization called science-based targets. And that is one of our main targets for this year. And what that will effectively do is quantify our carbon footprint across the business into our supply chain as well. Once we have that baseline, that is a great starting point. We can then see what are sensible targets to really aim at and really work with our supply chain to achieve and then we can push quite hard into those areas. Otherwise, you can see that we have within our places area is all about the sustainability of the buildings we build, use of air source heat pumps, making sure that all of the buildings and not just the smart thinking has gone into how we build them, but then also how they can be operated long term, downstream, post construction, efficiently and sustainably. So I will move forward to leveraging our strengths. This really is a slide where we are thinking about possible ways to improve the business. And there are a number of potential areas, which we are sort of working through at the moment as a Board. And really, as I say, the main aim of this is just to have a better, more resilient business and then presumably that would have a stronger rating on the stock market. I think the key point to make on this is that we really believe in the forward fund, capital-light, [ high Rocky ] model, and we see that as remaining core. So then turning to the summary. Quite a bit has been covered in the last 35 minutes, and I don't intend to summarize all of it. But I think what we've seen is that over the course of last year, actually a very strong [ 11, 12 ]. And across the operations side on all areas from securing land, securing planning, undertaking development, forward selling well, managing build cost inflation proceeded well. And it was really in that 12 month where 2 of the planned sales fell over, which led to our update in October in terms of our performance. And where we're looking into the current market, we're still experiencing volatility as is everybody. But we are seeing those early green shoots of institutional investors coming back to look at the circa GBP 800 million of the consented pipeline, which we have for sale, really spending time, having signed nondisclosure agreements, getting into data rooms, doing due diligence on them, beginning to talk about pricing, which continues to give us confidence that we will resume forward selling in our financial H2. And I think longer term, the outlook for institutional investors investing in the residential for rent or the living sector remains incredibly robust. It probably is the most attractive part of U.K. real estate. And therefore, we would expect significant volumes of institutional investor capital to continue to flow into the sector. And clearly, as market leader of student accommodation and BtR multifamily development, we would expect to be at the front of the queue there for that capital. So that concludes the formal part of the presentation, and we can now turn to Q&A.

[Operator Instructions] I would like to remind you that a recording of this presentation, along with a copy of the slides and the published Q&A can be accessed via your investor dashboard. Sarah, Richard, we obviously received a number of pre-submitted questions ahead of today's event. And as you can see there in the Q&A tab, we've also received a number of questions throughout your presentation this afternoon as well. So firstly, thank you to all of those on the call for taking the time to submit their questions. And Richard, Sarah, if I could just hand back to you to respond to those where it's appropriate to do so, and then I'll pick up from you at the end.

Perfect. Thank you very much, indeed. So let me just turn to the first question here. And I think Sarah can probably pick this one up. So let me pose it for her. For the 2 sales that didn't happen last year, have the buyers completely gone away? Or are you back in discussions with them? If not, how are the sales discussions progressing?

Yes. No, of course. Thanks, Richard. So in terms of those 2 sales, they are obviously still very much part of that consented pipeline that I took you through in the slides. In relation to one of them, that the previous buyer is back in negotiation with us, which is very positive in terms of market sentiment. The other one has gone away, but we obviously have a lot of interest coming through from other parties in relation to that asset. And as Richard said, we've obviously got a significant number of investors in the data rooms, having signed DAs and, obviously, looking across the whole portfolio.

Perfect. Thanks, Sarah. And I think there's another good question has come in, which perhaps I can just pose to yourself which is really saying, what are the top 3 risks perhaps an [indiscernible] risk, but what are the top risks that could stop you hitting the 2023 outlook?

Yes, and of course. And I think there's probably really 1 significant risk and that is our assumptions on that forward sale market returning -- not happening. I think I set out in that bridge, the level of revenue and profit dependency from us having to complete forward sales in the second half of the year. As I said, we have really just assumed that the land element of the forward sale, and therefore, DA gives us a little bit of flexibility of timing, but there is still, obviously, a significant dependency on the market reopening and on us be able to complete those sales in the 6 months to the end of September. But again, as Richard has alluded to, we are seeing very great levels of interest at the moment and really kind of continuing to work through all the processes that we need to get their sales through. And I think probably a key point is that, internally, we've obviously done a lot of work to get these fit for purpose and ready to be forward sold up and ready and, obviously, working with our lawyers and our other advisers to make sure we can make that process as smooth as possible.

Perfect. Thanks, Sarah. I'll pick up the next one, which is, what is the typical net income yield that your BtR developments offer to investors? So I'd say income yield clearly varies across the U.K., but a blended average is probably around 4.25%, it's around that sort of level. That would be the net initial yield. And of course, as we looked at that slide just a few minutes ago, the best way to look at total -- well, the best way to look at property return is to take your net initial yield and you add to that your rental growth. So rental growth residential at the moment across the U.K. is at elevated levels. I've seen some cities which are crossing double-digit annualized growth. Now I don't think any investor would look to bake in that sort of level for very long. But nonetheless, if you were to potentially put into your model, maybe 4%, something like that for the next few years, perhaps then trending down to 3%. I think that would be relatively prudent. And of course, what that would give you is comfortably a total -- an ungeared total return in the 7s potentially even slightly higher into the 8s. And of course, when you put this -- when you compare that as a spread to the risk-free rate that gilts are -- they are fluctuating, but gilts short to long somewhere in the 3s to the low 4s. That is probably an attractive spread. So Sarah, if I can pose you this question that's come in, which is how is the cost inflation in labor and construction materials impacting your business?

Yes. No, of course. Thanks, Richard. So our forward sold model means that when we complete a forward sale, we also secure and lock in our procurement packages at the same time. So we obviously do that by working through with our subcontractors and getting a price for the packages in terms of -- for them to be able to build out the development. So at the point of that forward sale, we, obviously, have full visibility of revenue and also full visibility of costs and, therefore, full visibility of our margin. We obviously also, when we're going through the numbers of development would build in a level of inflation for build cost historically. So last year, that would have been between 7% and 8%. We're, obviously, now looking at lower inflation levels and the said kind of 2%, 3%. So our model allows us to protect against build cost inflation as we look forward. And as I set out in our -- in that kind of block to rebuilding the margin, we would like to see that there will be some incremental benefit to come through as we're procuring at the moment where we think there has been a decline in build cost inflation. As Richard said, we're expecting that to come through from materials. We still think, given some of the pressures on the U.K. economy, that the land piece will be sticky.

Perfect. Thanks, Sarah. Let me pick up the next one, which is built around student accommodation or affordable homes, where do you see the greatest upside? I think at the moment, we're seeing strongest appetite, greatest potential liquidity within student accommodation. And so given the fact that our highest margin development is also student accommodation, and this is an area which we are going to be just focusing on a little bit more strongly. We still firmly believe in build-to-rent multifamily very significant addressable market. And I think it will continue to be a very important part of the growth of the company over the coming years. And then as Sarah flagged just a few minutes ago, on the affordable housing side, we do really believe in it. But seeing as it's a relatively new part of our business. And clearly, we are going through volatility at the moment. We are just pausing to some extent, our sort of plans, aspirations for this part [indiscernible] safety through the volatility and then potentially -- well, we certainly will then revisit exactly what we're looking to do next there. There's another question about who are your competitors and how have they fared in this environment? Is it a buyer's market for institutional investors? So in terms of competitors, it's difficult to characterize exactly who they are. Principally from a development point of view, they would be your SME developers with regional biases and regional focuses and regional areas of expertise. They are very heavily bank debt dependent and therefore, have been extremely quiet recently. But equally, as I mentioned earlier, we tend to buy land in town and city centers. So we have come -- and we do come up against hoteliers and commercial developers and so on. But again, they're very quiet at the moment. I think they will be actually for quite some time. And which does give us a very interesting opportunity. And then the final bucket of competitors are probably the REITs. So the student REITs and I'd say the BtR REITs, there's, obviously, [indiscernible] which is intending to convert, but I already sort of think of them as a REIT. And all of those businesses have expressed quite a high degree of caution about their development program at the moment and understandably so because their core business is their operational platform, and that needs all the sort of care and attention they can provide and discretionary activities such as development, understandably take a bit of a back seat. So I think in some what that does is it does create good opportunities for us to go and secure attractive land at competitive prices to really sort of build up that next wave of our development pipeline. And then the final point, is it a buyers' market for institutional investors? I mean, I think you have to say at the moment, the market tilted in favor of the buyer. And we know that markets move and evolve. So we expect that to continue for a period of time through this volatility. That's why Sarah has said, we've been pretty prudent as to the sales values, which we think we can achieve for our next wave of consented forward sales. But then, of course, as the market normalizes, my strong view would be that there is real scarcity value in consented student accommodation and consented BtR schemes across the U.K. And therefore, a lot of competitive tension from bidders tends to tilt it back firmly in favor of the seller. It's worth bearing in mind actually being able to secure planning is really not that straightforward. In fact, it kind of leads me on to the next question, which let me read out and I'll talk about planning. There's a lot in the press about the planning system being dysfunctional, how do you see it currently for your sort of development? And how do you see it evolving? So as I said, that was -- I already sort of started that segue into that question. It's a very good question. I mean it is -- planning is very bureaucratic and it's highly inefficient across the U.K. And therefore, if you have a track record of securing planning on a fairly regular basis then I think that is a real source of competitive advantage. And it's something which WJ has a good track record with, and I flagged a couple of possible reasons for that earlier. And I think it does mean that we have confidence about continuing to convert land into consented schemes and when you have land and you put a planning application in, it's an aspiration to have to better monetize it, but once you have your planning permission, then you can monetize it. So it's a really important gateway for any developer. And as I say, we do have a good track record there. Sarah, I'm going to raise a question for you that's coming about subcontractors and costs and things like that. So the question is how much pressure is there on your subcontractors? And does this throw out your cost assumptions?

Richard, I just think we've just lost Sarah. So let me just bring her back through, if that's okay, sir?

That's okay. And I'll pick up this question, just while you're doing that. So yes, it's interesting, just like all markets, as they evolve, there are some important changes and pressures and things, and just like there is on global supply chains at the moment in every single sector and industry, yes, there is pressure on the subcontractors and their supply chain. And it is one to be monitored quite closely. We are -- I mean effectively, I think the narrative behind this, and is quite an obvious one is that a lot of construction work takes a year or 2. And therefore, there are a number of contractors who secured work perhaps just pre this market inflation last year and potentially, therefore, the actual margins they're making are significantly lower than they thought they would. But I guess they were trading through fine because they assume their order book would be very strong for this year and potentially next year and potentially also not just a strong order book, but perhaps higher-margin order book as well because of the rate of inflation. And clearly, what is happening now is that not only is the order book getting smaller because construction activity in the U.K. is reducing pretty sharply. But also, as we set out, the build cost inflation is coming down quite quickly. It could well go negative for materials, that would then put pressure on their margins. So I think there is definitely a risk of heightened distress. But as I say, it's probably no different to any other part of supply chain, and I'm positive, it's being experienced globally. It is one to be managed very closely, is one to watch for quite closely. I do think we have an advantage in that, we are a main contractor as well. And therefore, we do have good visibility into supply chains much more than your typical developer would have. But it's a good question because I think there is -- we need to be very vigilant in that sense.

Sorry, Richard, just to say Sarah's back on the line.

Perfect. Thank you very much for finding Sarah. So Sarah, I've got a question for you, which I think could be our last question, just looking at the clock. But -- and I'll just read it straight out, but sorry if I missed it, but how can the contracted forward sales be lost i.e., the 2 from end of the prior year? And if they can be lost, why should you investors be confident in the contracted sales level forecast for '22 and '23?

Yes, sure. Can you hear me? Just to check.

Yes.

Perfect. So -- if I -- in terms of our contracted sales levels, as I said, there are schemes that we've already forward sold. So we forward sold those in financial year '22. We've got a contractually secure agreement with the purchaser. We are building those out on site. And obviously, we take the revenue and profit for those to the P&L on a monthly basis. In terms of the 2 forward sales, they were delayed just at a point so we were going to complete the forward sale, and therefore, we couldn't recognize any revenue. We haven't obviously done anything more with those, but they are still very much part of that consented pipeline which we are working through the market with. So we have those out in the market and obviously talking to a number of purchases in relation. So moving toward to then completed the forward sale on them. So I think it's really to differentiate between what we do have secured, where we have a contract, and we are building out and the ones that we are looking to take into contract.

Perfect. Richard, sir, if I may just jump back in there. Thank you very much indeed for addressing all of those questions that came in from investors this afternoon. And of course, if there are any further questions that do come through, we'll make these available to you immediately after the presentation has ended, just for you to review to then add any additional responses, of course, where it's appropriate to do so. Richard, just before redirecting those on the call to provide you their feedback, which I know is particularly important to yourself and the company, if I could please just ask you for a few closing comments to wrap up with, that would be great.

Well, I'm simply going to say thank you very much for your time this afternoon. It is really useful getting direct feedback and interaction with all investors not just some of the largest institutional holders on the register. So this has been particularly useful and to get a lot of Q&A into the nitty gritty of the business, I found really interesting. So on behalf of myself, and Sarah, a very big thank you.

Richard, that's great. And Sarah as well. Thank you, once again for updating investors this afternoon. Could I please ask investors not to close this session as you'll now be automatically redirected for the opportunity to provide your feedback in order that the management team can better understand your views and expectations. It's going to take a few moments to complete, but I'm sure will be greatly valued by the company. On behalf of the management team of Watkin Jones Plc, we would like to thank you for attending today's presentation. That now concludes today's session. So good afternoon to you all.