Good morning, and a very warm welcome to the half year results for Watkin Jones, for the period October, through to the end of March. Myself and Sarah Sergeant, very much looking forward to taking you through, the results for that period and giving you some context just to bring you up- to- date, with the sort of broader and wider sort of market. Also it's worth noting, it's also the first time that we've actually met, face-to-face for one of our set piece, presentations, and we're both, very excited about that and it feels good to be back in person too.
Before I just give you a bit of a preview or an overview on the agenda, I'm gonna start with a overview for the half year, and I'll also do that overlay to bring you up- to- date. I'm gonna sort of talk about the Building Safety Act provision, which we've taken as part of the half year position. I'm gonna hand over to Sarah, who will pick up the financial review, talking about our capital structure, looking at our development pipeline. She'll hand back to me and I'll pick up a bit of a sprint through the sectors which we cover, the sector review.
I'll also bring you up to date with a few of our steps forward in respect of our ESG Future Foundations, part of our business, prior to summarizing what you've heard, and then opening up to Q&A. We anticipate the entire session lasting about an hour. If that makes sense, I will kick off with the half year overview. What's the best way to sum up the first half? I think overall, really good progress in the first six months of this financial year. Investor demand for our products across Purpose-Built Student Accommodation, PBSA, Build- to-R ent, BTR, and Affordable Housing, has never been higher.
Our operational capability to manage the three pillars of build cost inflation, growth in asset values, and maintaining target margins is progressing well. On-site progress from the delivery teams constructing our 15 live buildings is good. We are managing build cost inflation, supply chain constraints, and resourcing of those sites well too. Our pipeline is deepening and is at record levels, and we expect the next phase of the cycle to present some particularly attractive land buying opportunities just as we did in 2020, which will further build on our strong future performance.
In terms of overall, Fresh, our property manager, is continuing to grow beds under management strongly as it establishes itself as the go-to manager of residential for rent assets in the U.K. Our first half performance is in line with our expectations and sets up a strong H2, and we are on track for full year performance. Bringing you up to date, the student portfolio sale announced this morning is a material part of this and should reinforce confidence with circa GBP 20 million of profit to be taken in H2 to be recognized for the full year, the financial year.
In terms of our H1 results, our first half results, revenue is higher than last year with margin being lower as expected. This is driven by higher volume of lower margin land sales and the decision to aggregate several PBSA assets into that portfolio that I've just mentioned we've closed, which understandably, will take slightly longer, to run through the due diligence when you have a slightly more complex, portfolio to sell than individual assets.
Accordingly, on the basis of our underlying business is performing well with good liquidity, we are declaring a dividend of GBP 0.029 per share, which is up 11.5% year-on-year. The final point from this slide, which I will come back to again, is on fire safety and the Building Safety Act. Further to our stated position at the prelims in Jan, and also in our trading statement just a few weeks ago, we have booked an exceptional provision of GBP 28 million in our half-year numbers in respect of the Building Safety Act.
This is expected to be fully utilized over the next seven years and covers the extension of developers' liability to 30 years, the inclusion of building heights of 11 m- 18 m, and the broadening from cladding to include life-critical fire safety defects. If we turn to the next slide, just looking at the outlook being on track. A good way to characterize this is to look at the underlying health of the markets and then look at our secured development pipeline. We'll come to the health of the markets in a second. If you look at our secured pipeline, which is the lead indicator of our future likely revenue and profitability, we can see that now stands at a record level of GBP 2 billion. That's up from GBP 1.4 billion this time last year.
It's comprised of 4,000 or circa 4,300 BTR apartments and circa 8,000 PBSA beds. Deeper than that, we have around 820 PBSA beds under offer and at an advanced stage of the sales process. We have quite a large number of BTR units and PBSA beds which sit behind that at earlier stages of marketing for sale, but which at this stage are proceeding very encouragingly. We also have made some good successes in the land market, new acquisitions and planning permissions over the last few weeks.
There's been a number of attractive new land development sites being placed under offer at our target margins, and we have recently legally secured a couple of BTR schemes as well as obtaining two material planning permissions, one in Belfast for a significant BTR scheme and one in London, again, for a material student accommodation, scheme as well. All of this is positive for future years' revenue and profitability. If I now turn to the fire safety and the Building Safety Act. I'll just give you a little bit more flavor. I'm sure you're pretty familiar with this overall position, but it's I think it is important just to sort of walk through the steps which have evolved over the last few months, 'cause the position has changed for the market, over that period.
The government announced in January 2022, so i.e. January this year, its intention to approach developers to fund the remediation of life-critical fire safety issues on buildings over 11 m and up to 30 years old. The largest house builders were subsequently asked to sign a voluntary pledge regarding the remediation of these buildings. What is Watkin Jones' position in respect of that? Well, I think the first point is that we have not been asked to sign the pledge.
However, we agree that individual leaseholders should not have to pay for costs associated with necessary life-critical fire safety remediation work. We've been consistent on that in our various updates we've set out in that respect. Following an initial review of buildings over 11 m developed by the company over the last 30 years, we have taken an exceptional charge of GBP 28 million. As I've mentioned already, the timeframe we expect at this stage to incur those costs is over seven years. We will keep the situation under review as the situation and legislation is clarified. We do expect quite a bit of secondary legislation to help the interpretation, the understanding of the act at this stage.
It's also worth noting that this is in addition to our existing cladding provision, which covers all schemes featuring ACM or HPL, so aluminum composite material or high pressure laminate cladding, which were at the time we took the provision in 2020, still within the limitation period. In respect of that provision, at this stage, we do see that being fully sufficient for the scope that we set out at the time. This is entirely new and different. It's the extension of the fire safety aspects. I think on that note, I'm gonna hand over to Sarah to bring you through the financials.
Thank you, Richard. I'm now going to take you through the financial highlights for the half year. We've reported revenue of GBP 193 million, which is an 8.2% increase on the prior period, and this reflects four forward land sales in Colchester, Edinburgh for PBSA, and Lewisham and Birmingham for BTR, as well as continued works across the portfolio. Our gross profit was GBP 29.9 million, which is at a gross margin of 15.5% compared to the 23.2% in the prior year. This is really due to the impact of the land sales in the period, and excluding this would be 17.5%, and also due to the stage of developments in the sites in build.
Underlying operating profit for the period is at GBP 14.6 million, again impacted by the proportion of revenue from land sales and the timing of the portfolio that Richard has just referred to, which exchanged this morning. Just moving on to the balance sheet. The key points to make here are regarding the net cash position at GBP 27 million. This reflects the normal H1 position in the cash cycle of the business, although this has been accentuated this half year due to the timing of the receipt on the payment for the land sale of Sherlock Street, which we completed just prior to the period end but received the proceeds ten days later.
Land and work in progress has decreased from the comparative period, but increased from the end of September, and that's due to the investment in land and the timing of the receipt, as I've explained. Then finally, the cladding provision, so total of GBP 34 million. This reflects the position of the original provision we made, which now stands at just over GBP 5 million, and the additional new GBP 28 million provision we've booked in these numbers. From a cash perspective, we've had a higher operating cash outflow than the previous period, due really to the investment that we've made in land, which will set up the forward sales which completed today and subsequently into the full year.
With net cash of GBP 28 million and the headroom we have on our RCF facility and the overdraft, we've got total available liquidity of GBP 140 million. A very strong position to be in. Then finally, proposed interim dividend of 2.9%, up 11.5% on last year. This is very much in line with our normal 1/3, 2/3 split of dividend payout. Now moving on to the segmental breakdown. These pie charts here show the split of revenue from the different sectors of our business. You can see the growing contribution from BTR, with a 59% increase from the prior period. We made good progress with revenue from development and build, and also for the forward sales for Lewisham and Sherlock Street.
PBSA revenue at GBP 78 million is down on the prior year, and that's really reflective just of the number and stage of developments in the sites of the build, given the number of sites that we completed in FY 2021, but does also include two forward sales. For our affordable homes business, we recognize revenue of GBP 5.4 million, which really reflects the continuing transition of the business, of the legacy business into affordable homes, and some build delays at the site in Preston, albeit a number of units did complete subsequent to the period end.
The Fresh business continues to recover from the pandemic, with revenue at GBP 4 million, due to the increase in units under management. Finally, in HY 2022, we recognized approximately GBP 11 million of commercial income in relation to fit-out of a development in Stratford. Just moving on to gross margin. For BTR, gross margin was at 12.9%, again impacted by the land sales. Important to note that we continue to target the overall margin for this sector at 15%.
For PBSA, this was just under 17%, but again, continue to target 20%. It's, you know, important to see that the Fresh gross margin is really starting to return to pre-pandemic levels as the occupancy increase and the variable fee income kicks in. This next slide really sets out the building blocks to delivery of our full-year position in line with expectations. You start on the left-hand side with the half-year position, and then you can see the ongoing contribution from sales, which we've already forward sold, and are in the build stage.
This is followed by the significant contribution from the PBSA portfolio, which we announced today, and this is approximately GBP 20 million. There are two other schemes, one student and one BTR, which we need to forward sell, where we are at a very advanced stage of the process. Then you can see a relatively small contribution from schemes which are at an earlier stage. In summary, given these blocks and given we've announced today, we're confident of the full-year position, given the bridge we've outlined.
I'm now going to look at the cash flow dynamics of the business and then consider the most efficient structure for the balance sheet and then an ensuing capital allocation policy. As you're aware, the group is a net user of cash for the first nine months of the year. We use the previous year-end cash position to finance the development work as we build out during the year. Equally use the RCF to draw down and finance site acquisitions on a site-by-site basis. The cash then recovers as the developments are completed and the bullet payments are received. This really gives us an intra-year cash requirement of GBP 100 million, and you can see the profile in the table before showing that average net cash position of around GBP 40 million-GBP 50 million and then the year-end and half-year positions.
With this, we then really look to agree the parameters for the balance sheet. With that hundred million intra-year cash position, that's to maintain a net cash position at the year end of max 1x EBITDA, and then 1x net debt on the bottom side. Of course, we'll continue to use the RCF on a site-by-site basis. The table on the chart on the right-hand side shows how on a pro forma basis, the EBITDA number gives a GBP 20 million surplus cash each year after operating items and dividends, which over five years amounts to circa GBP 80 million, really after any spend that we would take out on the building safety remedial works.
Really a kind of identification of the surplus capital, which we believe will be available in the business over the next five years to deliver growth and also to consider any potential shareholder returns. We then set a disciplined capital allocation policy, which allows us to invest in growth and also to consider shareholder returns. Firstly, on the left-hand side is really to retain a strong balance sheet with low gearing.
This is to be reflective of the cyclical nature of the business that we're in, but equally gives comfort to institutional purchasers when they're looking to enter into forward sales with us. We will look to maintain our dividend policy at two times cover, which is a healthy payout ratio. We'll then look at land investment opportunities across our business and potentially taking any advantage of the softness that we might see in the market, given the current environment. We will target M&A opportunities where there's compelling strategic logic.
Finally, we'll then consider any further return to shareholders if appropriate, but obviously with a flexible and discretionary approach. Moving on to our development pipeline, and I think the slide that you're all familiar with now. This now stands at a record GBP 2 billion, which is split between GBP 1 billion for BTR, GBP 900 million for PBSA, and GBP 100 million for affordable-led homes. As Richard mentioned, we've seen some really significant movements in this. We've secured four new schemes in the period, two for BTR in Hove and Brighton, and two student schemes in Bristol and Colchester, and have gained very significant planning consents for our largest BTR scheme to date in Belfast and the student accommodation in Stratford.
I think a couple of specific points to note on this chart is that there are a significant list of land opportunities that we are considering and have under review for both BTR and student, which don't yet come into this pipeline as not yet secured. This list stands at around 2,000 units for student and around 1,500 for BTR. There have, as you can see, been some movement, some shifts to the right-hand side, and that's really due just to the kind of nature of the business. If I give you an example of one, Nottingham, which is the student accommodation site which we just sold, you can see that that's just moved from FY 2025 and into FY 2026, and that's really just a result of the small delay that we've experienced on the portfolio, which sets that build program back a couple of months.
Couple of months from an academic perspective obviously then takes us into the new financial year. This next slide shows, as previously, the illustrative revenue growth year by year from this secured pipeline. I think the key points to note here, as you can see, revenue growth to over GBP 300 million is supported by 100% of sites secured, and that 31% of revenue for FY 2023 is now forward sold. Looking forward to FY 2024, 70% of the revenue is supported by sites secured. The same chart for PBSA. Again, key call-outs, really that in excess of GBP 300 million to FY 2023 and 100% supported by the secured pipeline. 25% of revenue for next year is forward sold, and that obviously has been updated for the sale that we announced this morning.
Finally, I'm just gonna give a bit more color on some of the different stages of our development journey. We are continuing to see a small discount for urban brownfield land, where the competition from retail, leisure, and commercial is still relatively soft. As we set out earlier, we will continue to assess the land market opportunities which may become more frequent in the market. From a build cost perspective, we are procuring our current wave of products at 7%-8%.
We're obviously seeing inflation in the period between putting our developments in the market and closing the forward sale, which previously would have been minimal. Through the kind of open book discussions we're having with the purchasers and the late stages review of build costs, we're able to cover these to enhance top-line values and maintain our margins. Then, of course, once we forward sell, we set our t hat's when our business model comes into play, and we set and fix those procurement costs for the build-out of the development.
The investment market continues to be very strong for our products, and we're receiving a number of offers for sites which will be put out in the market, which are all well ahead of the underwrite. From a planning perspective, we're making good progress, and this has obviously been evidenced by the recent successes in Belfast and Stratford. This is really where the expertise of our planning team comes into play. We are also favorably regarded by local authorities if we have a real track record of gaining planning and then building out. In summary, our strong balance sheet and track record ensure opportunities to build and opportunities to sell are coming to fruition. I'll now hand over to Richard to take us through the market slides.
Brilliant. I'm gonna do a relatively quick canter through the the various parts of the residential for rent sector. I'll start with the umbrella part, which we call residential for rent. It's also known as the living sector. I think you'll hear probably a very similar language as I go through the subsectors, which is I'll be talking about record volumes, record levels of interest. You'll see that being a real common thread through the living sector at the moment, where there is just a real focus. It's very much a hot sector, and it's been a rerating that's been coming over the last 10-1 5 years.
Good structural support for the next period for sure, out to many decades. If we look at some of the detail that's on this slide, I think there's some interesting stats which I can help bring out, which no doubt you'll scan yourselves as you sort of read through it. The overall market is continuing its positive rerating, as both an asset class for investors, but also, most importantly, from a underlying sort of tenant, resident demand perspective, and that's across the U.K. It's not simply sort of being picked up in the South East at all. It is truly a national thing. This market dynamic is really supportive for us into the long term. If we look at this from the eyes of the resident, 'cause that clearly is what drives the institutional investor.
If we look at supply and demand, there's 230,000 new rental homes needed per annum. But if you look at the entire BTR development pipeline in the U.K. at the moment, it's about 46,000 units, so there's a very, very big delta between the two. And of course, that demand is growing, not being matched by new supply, and then there's existing supply coming out, as we're seeing increasingly, Buy-to-Rent investors are selling out to own occupiers. We are seeing the level of rental accommodation actually drop. You, you'll see that in a subsequent slide when we turn to the BTR, in terms of net new supply of BTR has actually been negative for the last few years. That's, I think that's an interesting trend.
Clearly, that is very supportive of the living sector, the residential for rent sector. If you look at what this therefore does in terms of that supply demand delta, very simply, it is leading to longer tenancies, and this is being measured now in terms of tenancy lengths across the U.K., which is very good for institutional owners of residential. This excess demand is clearly fueling rental growth, and we're seeing some quite large rental growth generally across the major provincial cities across the U.K., spread quite evenly. London's catching up quite quickly too, which I think is interesting, from a period of underperformance over the last few years. Of course, the rental growth is directly capitalizing into the asset value.
Yes, resi is an imperfect hedge on inflation, but nonetheless, it's directly capitalizing into the asset value growth. That's what we're finding when we're taking assets into the market. Where rents are moving month-on-month, we can actually act. We can do a proper mark to market and access that asset value straight away, which I think is really helpful for us as a business. Therefore you can see on this slide about sort of forecast ungeared, annualized total property returns at levels of roughly 6.6% out to about 7% over a period of the next five years. This of course is driving the first time I'm gonna properly mention the record levels of institutional investment. It won't be the last.
We've seen GBP 3,500,000,000 invested into the sector in Q1 alone this year, which is a very significant step up from previous quarters. If we turn to BTR. That was the umbrella. If we then do more of a deeper dive. I think by the way, that bar graph is very interesting as you can see how institutional investment has evolved from initially focusing on commercial, but increasingly now is focusing more on the residential for rent sector. You can see that you've got the decline for the moment of office investment over the last few years, and you've seen a commensurate rise in investment into Build- to-R ent. I think that's a very interesting bar graph.
As I say, if we look at Build- to-R ent, very interesting investor rerating over the last five years. The relative attractiveness of BTR versus commercial real estate, as I've just said, certainly has been accelerated by the pandemic, and I think it's polarized on both sides. It's positive for living BTR, it's negative for commercial, and I think that will continue to be a key theme, which widens that delta. Not just the pandemic, digitalization, consumerism. Consumerism has been a very big push into renting, residential rather than this, more traditional approach to owning, your residential. As I say, this is a catalyst for BTR. It is not a disruptor.
If you're gonna pick up on any mega trends, these are relatively well established, and they are strong, and it's very much supportive of BTR in the living sector. The high proportion of tenant satisfaction, which again I think is interesting, within BTR, which is set out here, underlines the demand profile. Again, second time I mentioned it, consequently, there's been record levels of investment within BTR in calendar Q1 this year, at GBP 1.7 billion, with associated yield compression to on average about 3.5%. Interestingly, forecasts are for further yield compression because of the strength of demand and unmet demand with very, very limited stock available in the market.
If we turn to PBSA, student applications are up 7% for the next academic year, which is positive, but actually that comparator is to the 2019/2020 academic year. That was the pre-COVID academic year. 7% growth for next academic year compared to what was seen in 2019/2020 pre-COVID. I think that's actually pretty significant. I think it's quite a powerful stat because it's showing that the levels and the appetite and demand for student accommodation, or I'm sorry, levels of demand for applications to come and study higher education within the U.K., is now eclipsed where we got to at the height of the market just prior to the COVID disruption, which I think very much sets the scene for the resilience of this sector going forward.
There is a clear expectation for full recovery in student numbers for the academic year, which will start in this autumn. As ever, the main drivers are the U.K. demographic growth and overseas international growth in demand, which will continue to grow student numbers within the U.K. into the foreseeable future. Still looking at forecasting about 230,000-240,000 growth in student numbers by 2030 from where we are today. Bookings for the next academic year are following this application data. When you've got the high level, you've got the lead data into applications to go study at universities, then you have more specific lead indicators about application rates to come and book at your accommodation for next year.
Our own data points with Fresh, our property manager, where applications are significantly up year-on-year. We also have Unite as another listed business, where their level of bookings for next academic year are currently sitting at about 77%. Again, when you look at investor volumes, how does this translate to investor volumes? What I think is interesting is if you look at that bar graph in the bottom left there, you can see that actual volumes in 2021, so last year, arguably still wrestling slightly with some aspects of COVID, we saw higher volumes in terms of investor appetite than we had back in 2019, which was pre-COVID.
If we bring it all the way up to date to 2022, Q1, GBP 1.1 billion with as much as GBP 5 billion in the market. Very much expecting, I'm gonna use it a third time now, record levels of student investment activity for this year. The market's actually very positive. To return to Affordable Housing, very sadly, the picture here is one of continued growing demand, unmet demand, with supply lagging a long way behind. You may have thought, given the prominence this subject has had, this dynamic might have started to change, but it certainly hasn't, and if anything, it's getting more stuck. This though does create a material opportunity.
Again, what I think is interesting from these stats which are on this graph is that there's effectively a shortfall of about 93,000 affordable houses being delivered each year within the U.K., and that equates to a GBP 34 billion per annum of investment opportunity, which potentially the institutional sort of partners could bring their capital to bear to start making a real difference in this respect. Of course, that is squarely what our aim is within the Affordable Housing side for our business. What I think is also interesting is housing associations invested 20% less last year into new homes.
Of course, we know they've got capital tied up essentially with legacy issues within their own built estate, which is a real opportunity for the private sector to come forward in partnership with Homes England, very sort of material approach. There's been various assessments here that private sector investment in Affordable Housing will grow sevenfold from where it is today by 2027.
I also think what's interesting, at the moment, there's a rumor with the government, they're trading a few ideas, aren't they e xtending this Right to Buy scheme would certainly create a very big opportunity for developers such as ourselves who are focusing on Affordable Housing for the housing associations who will then sort of get a bit of a windfall in terms of capital to recycle that back into new stock and replenish the stock which they've perhaps just lost to enfranchisement. I think, again, could be an interesting trend for us.
Overall, you can see that the sector we work within, the residential-for-rent sector, is extremely robust. Just turning to ESG, which we have called, as you know, Future Foundations. Good progress in the period, having launched our strategy in November last year. As you know, the strategy is built around the three pillars of people, places and planet.
We are now in the delivery phase of our strategy, which is really energizing for the business, as we can see incremental improvements across a broad front across the company, almost on a daily basis. Cumulatively, we're on track with our plans at this stage. I'll just give you a flavor for some of the things which we're up to. If we start with Planet and Scope 3, so that's our supply chain sort of carbon footprint, we are working with our supply chain to explore how we can utilize much more off-site manufacture and modular methods to reduce the amount of shipping and haulage, which otherwise is involved to bring those items individually to a construction site prior to them being pulled together. The carbon footprint is many times larger.
If you can effectively create a unitized solution off-site and then just bring one sort of piece of material actually to that site, it actually makes quite a meaningful difference. That is something we are exploring pretty closely with our supply chain at the moment. We're very hopeful that we can bring some innovations into how we actually sort of piece together our building over the next period. In terms of Scope 1 and 2, again, some good incremental steps. We switched our car fleet to electric and hybrid already. We swapped our construction plant for more modern energy-efficient plant, and that's from our tower cranes through to generators. It's all been changed. We've also been reducing the energy footprint of our office space as well.
On the people side, we partnered with a social mobility charity called Talent Tap, and their mission is to help young people realize their potential, and build confidence to grab it, be it academic or professional. What Talent Tap do is they run a series of residential courses, where we look to host them in our completed developments, which make perfect venues given the blend of en suite accommodation above and then the larger sort of communal space on the lower floors, which are ideal for hosting smaller sort of conferences and sort of tuitions and various things like that. This is especially true of student accommodation, where there are voids traditionally over the holiday periods as well.
Finally, in respect of our places, we've made some good progress with the long-term sustainability credentials of our built buildings and our current secured development pipeline. The efficiency of sort of longer term downstream sustainability of our buildings is measured in two ways through planning. One's called BREEAM, and that's for student, and the other one's called HQM, which is Homes Quality Mark for BTR. We have materially moved up the rankings, which we are now demanding of all of our schemes going forward. BREEAM is now excellent on every single scheme as a kind of hygiene mark. HQM, Homes Quality Mark, is up to a four-star standard.
Again, sort of materially move forward the sustainability credentials of our sort of secured pipeline. Let me just turn to the summary. Overall, therefore, we've had a strong first half, which sets up the full year and follow-on year as well. The additional news on the student portfolio disposal this morning reinforces this position. Our sector is performing strongly and is very much structurally undersupplied. Consumer demand is growing well, and the sectors are rerating positively.
Operationally, the business is delivering across all areas, so that's land acquisitions, that's planning permissions, that's forward sales, it's our construction activities, and it's Fresh's ability to provide excellent customer service and grow. These three pillars I mentioned earlier, that relationship between cost, value, margin is working within our business, and we can operationalize it well at the moment.
It gives us real confidence for the future. We do believe that we've now drawn a line under the Building Safety Act, and we are prepared and ready for our responsibilities within that over the coming period. With our robust balance sheet, liquidity position, and record secure development pipeline, we are looking into the future with confidence and excitement. On that note, we can turn to Q&A.
Thank you. Glynis Johnson from Jefferies. Four if I may. First one, just in terms of that GBP 20 million profit, from those, that you effectively booked this morning, how much of that is from the operational assets and how much of that is the forward land sales for the three assets? Second of all, you very kindly talked about the sort of plots that are sitting in the land that you're looking to acquire. When should we be knocking on your door questioning when that land needs to effectively come into the pipeline for delivery? You often talk about the sort of 24 months build time in terms of PBSA, the three-year build time in terms of Build- to-R ent. So when does that land sale really have to happen or land buying have to happen? Thirdly, M&A.
What kind of M&A? What assets do you need, want? What skills do you need or want? You know, what is M&A for your kind of business? And lastly, the Building Safety Levy. What is your understanding of what that might be for your business? 'Cause clearly it's a very different business, and I appreciate there's lots of things that we don't know about Building Safety Levy and also the building levy and the Section 106 potential changes. What's your understanding of what that might mean for your business?
Should I take the first two?
Yeah.
I mean, just on the circa GBP 20 million, it's probably about a 1/3, 2/3 split from operational properties to the development sites. That's obviously, you know, the operational properties, that's obviously all in the year. The development sites obviously then will continue to contribute profit in the outlying years. Second question, just in terms of those plots which are kind of sitting below the land bank that you see on the slides. I mean, I think that's really, you know, we are kind of advanced enough in stages where they would forward sell in 2023. So it'd be a revenue and profit contributor in 2023 to then obviously completion in 2024, 2025. That's across both student and BTR.
Perfect. If I pick up the building safety levy. I mean, clearly it's effectively a planning tax, which there's been no disclosure on. I think there's been some speculation about the overall number they're looking to raise, and therefore you can look at how many planning permissions are granted each year and divide it, and then you can get a per unit tariff. Glynis, I'm sure you've done that. That's probably as much as we know at the moment. I mean, clearly from our perspective, we are not a prolific developer of individual houses, and therefore the fact that individual houses are currently in this means it will dilute any potential impact on our more traditional mid and high-rise apartment blocks. That's as much as we understand at the moment.
I mean, it is worth noting that effectively any taxes relating to land will ultimately be borne by the landowner. We all know that the price we pay for land is a residual calculation of netting off everything, including your required profit. Therefore, any tax that comes in will ultimately be borne by the landowner. If you think we're about to come into potentially quite a fragile economic environment, that is doubly the case in terms of land values. I'm pretty confident we'll be shielded from that. There will be a transition, of course, where we've secured land, and we'll just have to sort of wear that extra development cost.
M&A, as you can see from our presentation here, we are very, very sort of keen on BTR, PBSA, and Affordable Housing. There's not any particular area which you would naturally be drawn to. I think there's practicalities. There are not really any large PBSA developers. Effectively, there are not so many large BTR developers with really interesting development pipelines, but there are in Affordable Housing. We're certainly scanning the arc across all those areas.
You'd be looking to buy assets, you'd be looking to basically buying land effectively. Is that right?
To potentially accelerate our ambitions within Affordable Housing. Equally we are always looking at PBSA and BTR too.
Morning. Kieran Lee at Berenberg. Just a couple on me. Firstly, you mentioned that there'd been delays in the PBSA development pipeline, two to three months I think you said. Given that these assets complete ahead of the new academic year, has there been any impact on pricing or are you having to compensate potential owners given your- You'll have vacant assets for up to sort of nine months. Then secondly, on that building safety provision, do you expect to recognize the GBP 28 million linearly across the seven years, or do you think there'll be peaks and troughs? To what extent do you think you can recover from contractors or insurers, et cetera?
Shall I do the first one? Does that make sense?
Yes.
Yeah. In terms of timing, if the transaction changes in terms of executing it, that won't directly just mean that the student asset, in particular, will then PC a month or two into the start of the academic year. We will either look to accelerate it, and that will all be part of our sort of cost calculations and our appraisal when we're underwriting it to ensure that it's ready for the start of the academic year.
Potentially, as Sarah's mentioned earlier, when she was looking at things moving out financial year, it might just then wait another 12 months and be ready for the following academic year. At the moment, what we're seeing is that in our programs, we do build in quite a bit of contingency for some delays, and therefore, we're still confident about delivering for the targeted academic year.
Just on the GBP 28 million provision, it will be spent up to seven years. I think given that the secondary legislation from the act still needs to be clarified and defined, I think we'll probably see little spend in the first year, bulk of the spend probably kind of two to five years, and then the balance really in the last two years. From a kind of cash flow perspective, I've obviously pro forma it on a kind of straight line basis.
Yeah. Colin Sheridan at Davy. Thanks for that, guys. Just a couple from me, if I can. First, just on the provision, following up again. At this point, do you think there's any maybe mooted or feared changes to that legislation that you maybe think might have a material impact on the level of that provision going forward? Or are we now just at the point where you're really measuring the extent of the existing legislation in relation to how big that provision may end up being or how much may be utilized? I suppose, Richard, you sort of provocatively started talking about the next phase of the cycle.
Without going into exactly what that might be or what it might look like, if it does at least contain a greater number of opportunities in your mind, I wonder to what extent you're confident that you can bring customers along at the same time there, given how close you sort of timing back-to-back transactions, given that they might be facing a very different set of economic challenges at that point in time as well. I suppose the follow on from that question being whether or not Watkin Jones would be willing to maybe take a little bit more risk by way of more speculation or maybe a little bit more leverage in the future too.
Perfect.
Yeah. I'll try to take the provision point. I mean, I think as we said, it's kind of an estimate of the review that we've done at the moment. We consider it to be not a full provision, but it's the right number. I don't think from a legislative perspective that would increase, but obviously, as that's clarified, opportunity to potentially bring it down. Kieran, sorry, I didn't answer your point about any recovery. In that number, we haven't assumed any recoveries from a kind of subcontractor perspective, but obviously, we'll continue to work through that, as we kind of, you know, finalize the investigations.
Just on your second question there. I mean, hopefully, Sarah did sort of set out our sort of capital structure and our approach to available, sort of cash or liquidity. We were looking to reserve some capital for sort of special opportunities. Potentially the next phase of this cycle will present some really interesting opportunities in terms of land buying. Whilst the business' preferred route is to take options, as you know, if there was an exceptional profit opportunity available, but in order to access it, you needed to put that land on your balance sheet, i.e., buy unconditionally, then that is something we would consider to do.
Thanks. Clyde Lewis at Peel Hunt. I think I'm gonna match Glenn's with four as well. Just when you're thinking about your sort of forward sales versus aggregating portfolios, I mean, they obviously get you to the same position in the end, but they give a sort of a different risk profile. I'm just wondering where your thoughts are about how much you do of the aggregation versus the single forward sales. You know, clearly the bigger units are probably sort of easier to do in the forward sales, and the smaller ones probably suit more of an aggregated sort of portfolio approach. But I'm just wondering in terms of sort of the balance of the business as you go forward, how much do you want to do of one and of the other?
Because obviously, implications for cash flow and implications for sort of when the profit gets recognized and whether we end up with the lumpy first half, second half splits again and all sorts of things in there. One on the cladding. Can you let us know how many properties do you think are sort of exposed or covered by that provision? One on the margin bridge. You very kindly gave the difference in the margin between reported and what the impact would have been around the land sales. I think that leaves us sort of 17.5% against the 23.2%.
I'm just looking for a bit of help in closing that gap. The last one was on affordable opportunities, which was, I suppose, sort of around, you know, the sort of schemes you're looking for, how your thoughts have evolved there. Obviously, I saw the one in Belfast, which sort of got my eyebrows raised a little bit. Just sort of, I suppose, understanding where you think the sort of opportunities lie geographically for the group and also the sort of schemes that you're likely to take on, whether it's gonna be a real mixed tenure type activities or much more exposed towards affordable.
Yeah. Perfect. Shall I pick up portfolios? I can do the cladding one.
I can do the last one if you do the margin one in the middle.
Brilliant. Okay. You're absolutely right. We've got this balance, this really obvious balance. If we take an individual asset into the market, assuming there is just a normalized market, as opposed to taking an aggregate of assets into the market, it's very likely we'll get a better premium for the portfolio because people are prepared at this point in time to pay a premium for access to higher high volume of stock. The downside is the point you're making, Clyde, which is that if we are to sell portfolios, it does take a bit longer. There's more risk to manage.
There's clearly a lot more due diligence to be done. The whole process will just take a bit longer. As a business, we're reporting every six months, and it's really important that we can give shareholders good visibility of good momentum of very predictable sort of performance and so on and so forth. We've just gotta balance this sort of friction between that. I think there is an understanding with our shareholder base that we are a-- we're a kind of low volume, high value type business. Not so many transactions each year, but when they land, they do make a material impact positively to the performance of the company, not just in year but multi-year. There's an element of latitude around that, and I think we're seeing that this morning.
Notwithstanding that, we do need to deliver in these reporting periods. I think we need to balance and blend. I think the other thing we need to. I think it'll be a balance of it. I think we will typically favor the individual assets 'cause we can see those trading relatively quickly, and there's really strong liquidity. And possibly we're foregoing absolute sort of premium value which might be there for some of the assets. The other thing we need to bear in mind is that, of course, as the cycle unfolds and evolves, then investor demands change too. Clearly the last few years has been all about aggregating as much as you could and prepared to pay handsome premiums for it.
That might change, and so we just need to be aware of that. Through all of it will give us a sort of strategy which I think is relying on individual asset sales for the majority, but from time to time, recognizing the exceptional value in portfolios and looking to take that on. The second was about number of properties. It's in total it's just under 20.
Just on the margin bridge, Clyde. If you think about FY 2021, it was a relatively high growth margin across both student and BTR. Kind of couple of factors that came into that. BTR, if you remember, we had the turnkey property in Leicester, which obviously we forward sold. Took the risk on and sold on completion in the summer months, obviously took the risk and therefore came with a slightly higher margin. With student, it was really the number of sites that we had that were actually completing that year. Colchester would be the standout one where we had a high margin. Really, I guess it you know where we are, if you exclude the land sales, really represents the early stage of developments of the majority of sites that we have on build at the moment.
Yeah. I suppose behind my question was sort of there hasn't been an underlying shrinkage in gross margin.
No.
Higher build costs.
No. No. The final one about Affordable Housing. We are looking at sites typically which the volume house builders wouldn't. That's just, it's generally in terms of the amount of units. Typically our sweet spot's between about 100-150 units, which sits just on the bottom edge of how they look at things. I think that's a good way to sort of make a market for yourself. In terms of geography, we're very much focused in the northwest at the moment, but you have to go a long way northwest to get to Belfast. We are also open to opportunities which come from the core activities of our BTR and PBSA business.
Where we are undertaking developments nationally, and there's an opportunity for really good quality Affordable Housing development as part of it, we will certainly do it. That there is the example of the Belfast scheme. But at the moment, it's the northwest of England and it's where we're focusing on affordable. But we do intend to scale that up nationally over the next few years. In terms of the tenure, we really like the fact that our residential schemes will be Affordable Housing led. We think that is a really good product to the market. I think the balance of tenure, because we recognize that we probably wouldn't ever see or wouldn't. Never say never.
We wouldn't see at the moment a sustainable mix of residential housing types being 100% Affordable Housing. We think there will always be a balance, and we think that balance will favor BTR single family, because we have the opportunity to forward sell the entire development to the same institutional purchaser in one transaction. I didn't talk about it at all in terms of the sector, but we're seeing sort of really strong volumes grow on BTR single family as we're seeing volumes growing for BTR multifamily, the tower blocks, as well. We do see a liquid market for that too. Yes, Conor, we've got about five minutes left, so there's time for a few more questions.
Alastair Stewart, Progressive. A couple of questions. First on the investor demand. It seemed to dry up immediately following the pandemic, then built up a bit and a lot. Can you provide some dynamics in what they're saying to you? You know, are they concerned about costs? Are they prepared to take on risk, sorry. Also in the land market, Sarah, you mentioned a softer land market. Typically who are you talking to in terms of the land market, and again, a bit of color in what and what the competition's like?
Perfect. Shall I do the first one and you do the second? In terms of investors, what are they saying to us? Well, clearly they are looking to get real assets, real yields. They're looking for hedges on inflation, recognizing that residential is an imperfect hedge, but it's actually performed very strongly in that respect over the last year or two. They're looking at the net initial yields of that total property return I set up there of somewhere between 6.5%-7% ungeared, and thinking that actually when you put some gearing on top of that, gives a very healthy geared total return. Are seeing that if there is further inflation in terms of rents and so on and so forth, then they are probably quite well protected for it.
You can definitely see institutional investors are seeking out residential for rent assets at the moment. They are very open to doing a mark to market, as I mentioned, as part of the presentation. Where you can clearly see rental growth month-on-month and time typically four to five months to close one of our transactions, clearly therefore the asset value's moved on whilst we're getting it documented. Actually, to have a sort of late stage review as we call it, with those institutional investors and just review on a Red Book valuation basis where that value has moved on to. They understand that the asset price can go up. That's part of the reason why they're buying it in the first place, that they're seeing positive movement. Alasdair, that's exactly how they're thinking about their investment decisions into the sector.
Then just on the land piece, I mean, continuing to come through our normal routes from a land promoter agent perspective. In terms of that competition and you know, that this has been probably prevalent through the pandemic and coming out of it, I think that need for kind of commercial office space, for retail, leisure is probably a little bit more on the up than it has been recently. Just, you know, those would have been the competitors pre-pandemic, relatively quiet post-pandemic.
Just time for one more.
Sorry, if I can just steal one more. Can you just sort of square the circle between you used to say you needed net cash of GBP 100 million, and that was gonna increase up to GBP 150 million, and that was in order to capture growth opportunities. Now you're telling us there's GBP 20 million per annum that's available for growth opportunities and a max cash up to 1x EBIT. What's the difference? How should we perceive the difference in terms of the definition versus what you actually need, and what kind of net cash we should be looking at as the minimum before we start talking about surplus?
Yeah, I mean, I think it's really. If you look about that GBP 100 million cash, it's making sure that we are making best use of the facilities available to us, which we haven't previously done, overdraft the kind of our RCF. And then it can be able to take the year-end position and build that out. I think the 20 million is a kind of aggregate pro forma, but probably a conservative position in terms of looking forwards.
That GBP 150 millionthat was previous is no longer a requirement?
Yeah. I mean, I think I, you know, the GBP 100 million, as you say, if we look in our forecast, that allows us to be a, you know, GBP 100 million plus the facilities allows us to be able to, you know, make those land purchases and finance the development as we build out the pipeline effectively and build out the revenue.
Perfect. I think we're bang on 10:30 A.M. I think it just falls to me to thank you very much for attending this morning. Thanks to Berenberg for lending us your offices. I look forward to catching up again soon. Thank you.