Giving it a couple of minutes for the start of the webcast. So good morning, everyone, and welcome to Grainger's half year results. Rob and I are here to tell you about another strong performance. This is the fifth consecutive results presentation where we have delivered double digit income growth. Once again, we've grown the size of our portfolio and accelerated our like-for-like rental growth. This growth in our income has largely offset outward yield movement. We're in a strong position, with more growth to come from our portfolio and from our pipeline of high quality rental homes. So the agenda this morning is, I'll take you through the highlights, the growth in our income, and how we've maintained momentum through a challenging macroeconomic environment.
I'll also talk about the volume of successful transactions supporting our long-term growth, our repositioning of the portfolio, and how this strategy is delivering for shareholders. Rob Hudson, our CFO, will take you through our half year financial results, the strength of our balance sheet, our valuations, and how our pipeline will continue to deliver a step up in our earnings and returns. He'll also explain our progress on ESG and our progress to REIT conversion next year. Then I'll give you some more insights into the housing market, customer affordability, our new launches, and our leading operational platform, and why these lead to a compelling investment case. And then we'll have time for Q&A with members of the senior leadership team. So once again, we have delivered a strong operational performance, and we've demonstrated our resilience, and this success is leading to compounding growth.
Like for like, PRS rents were up 8.1%. Our occupancy remains high at 97.7%, and we've got great retention at just under 63%. We have delivered GBP 71 million of disposals of non-core properties, with prices in line with valuation. This is sustaining our growth. We're resilient. We're a highly cash generative business, generating around 200 million of operational cash flow each year. Like all real estate sectors, we have seen outward yield movement, but strength in our rental growth has largely offset outward yield movement in our underlying valuations. We have a resilient market and business model, and this is enhanced by the work that we did in February 2022 to fix our cost of debt, which is in the mid threes for the next five years.
It's worth remembering that the residential market, be it investment or owner occupied, is vast and a highly liquid market, with around 1 million transactions worth an estimated GBP 260 billion a year. The growth in our portfolio, pipeline, and our like-for-like growth has a compounding effect. Net rental income is up 11%, and we're delivering scale today with a passing rent of GBP 106 million, with our new launches and our EPRA—our near-term EPRA earnings are set to grow to GBP 55 million in 2026. Our secured and committed pipeline will deliver GBP 41 million of additional net rental income, and this is locked in. Our growth, coupled with a scalable platform, means our EBITDA margin will improve from 53% to over 60% in the next five years. This is compounding growth.
So to the highlights, our net rental income is up 11%. Our dividend is up 11%, as we continue to pay 50% of net rents in dividend. Our rental growth for PRS is 8.1%, and rental growth is 8% overall. Our adjusted earnings are down slightly, reflecting our disposal program of non-core assets, particularly the regulated tenancies. Our EPRA NTA is 294 pence per share, which reflects the 8 pence per share impact of the removal of Multiple Dwellings Relief in the Budget, a one-off valuation impact rather than a cash cost, which Rob will give you more details on later. We have stable underlying valuations as the strong occupational market continues. Our customer affordability remains healthy, with our average household spending 28% of their income on rent.
As our portfolio is now 80% PRS, we are on track for REIT conversion next October, and all of this is built on a strong balance sheet. Moving to our pipeline, we have over 11,000 operational homes worth GBP 3.4 billion, and a pipeline of 5,000 homes worth GBP 1.5 billion. We still have GBP 730 million of regulated and assured tenancies, and we have GBP 2.67 billion of PRS homes. We have GBP 523 million in our committed pipeline, and GBP 541 million in our secured pipeline, and GBP 423 million in planning and legals. An overall pipeline for growth, which will double our rent roll from full year 2023.
Our growth and our transition to achieve 80% PRS has continued despite the market, and it's continued because we have an excellent track record of transacting. Over our transition period, we have disposed of GBP 1.7 billion of properties and made GBP 2.5 billion of investments, all while delivering year-on-year for shareholders, growing dividend, and maintaining performance, which in the scale of a business with a market cap of around GBP 800 million at the start of the strategy, I think you may agree, is a remarkable achievement. Despite the difficulties in the market, our team have consistently sold well at prices ahead of valuations. Our sales have been carefully selected through our asset hierarchy process, identifying performance potential and rigorously recycling out of lower potential, lower yielding assets. These disposals are a mixture of regulated tenancies and smaller portfolios and older style PRS.
The UK residential market is highly diverse and liquid, with low concentration risk and pricing resilience. Our sales and investment team have a deep understanding and have worked well to identify purchasers and deliver a consistent sales performance. The Grainger team also has a consistent track record of buying well. Our leadership has been established by the creative and consistent approach by our acquisitions and development team. These teams, working with the wider Grainger business, have acquired a substantial pipeline in strong geographies, reinforcing clusters, and creating partnerships to access land. Many of our new schemes were forward funded or directly developed. As the market is maturing, it presents opportunities for stabilized assets, particularly as the market has a long tail of subscale investors in the sector, and this provides us with exciting opportunities for further growth.
The compound annual growth rate of our income is 13%, and as a reminder, it's 8 years averaging 13%, including the pandemic. We have a substantial pipeline, a platform which is driving efficiencies and has the capacity to grow further, and a maturing market which will present exciting opportunities for growth. We have a strong track record of transactions, and this is supporting our growth. And our growth in net rental income has supported our progressive dividend, and we see that elevated growth will continue. EPRA earnings will grow materially, and this, together with REIT conversion, will enhance returns further. In our market, with scale comes increased efficiency. This is a resilient business with low volatility, set to deliver a sustainable 8% total accounting return, supported by rental at constant yields. This is highly attractive on a risk-adjusted basis.
The essential nature of the demand for our properties makes this low risk, low volatility sector compared to many real estate sectors. So our investment case is compelling. We lead the sector with the largest portfolio and pipeline. We have a clear path to scale further. We're delivering compounding EPRA earnings growth. Our balance sheet is strong, our cost of debt is low and fixed, and we have built a best-in-class operating platform, powered by our Connect technology. We have clear visibility of our earnings and growth, and I believe this maturing market will provide us with exciting opportunities to grow further. And with that, I'll hand over to Rob to take you through the financials.
Thank you, Helen, and good morning, everybody. Today, I'm going to cover off the key financial highlights for the period, and also I'll provide you with some further detail as to how our business is well positioned to continue to deliver strong compounding growth for the years to come. The first half has seen a continuation of our excellent performance. Net rents increased by 11%, with like-for-like rental growth continuing to accelerate to 8%. EPRA earnings growth continued to be very strong, up 12%, and that demonstrates the beneficial operating leverage in our business, which is built for scale. As expected, adjusted earnings were lower by 6% due to lower sales profits as a result of our ongoing success in disposing our regulated portfolio and as we continue our strategic focus on growing recurring rental income.
Our dividend per share is also up 11%, reflecting our strong underlying performance. Underlying valuations were largely flat, reflecting the continued dynamic of strong rental growth, largely offsetting modest outward yield shift. The removal of Multiple Dwellings Relief, or MDR, has a one-off impact on the purchaser's cost assumption in the valuations of GBP 59 million, and I'll cover the details of this later. As a result of this, our NTA was down 4% to 294p. On the balance sheet, net debt increased to just under GBP 1.5 billion, in line with planned investments, with LTV now at 39.1%. With further CapEx being funded through our sales pipeline, we wouldn't expect any material increases in our net debt from here. Debt costs remained largely flat at 3.1%, reflecting the benefits of our previous actions we undertook on hedging.
Turning to the income statement in more detail. Our like-for-like rental growth accelerated to 8%, with the split between regs growth at 7.1% and PRS at 8.1%, with new lets delivering 7.7% and renewals at 8.3%. Stabilized gross to net improved on the prior year at 25.3%, as we start to deliver the efficiency benefits of our scale and our clustering model. And as you see at the bottom right of the table, EPRA earnings, which are an increasingly important earnings measure for us, are up 12%, demonstrating the strong earnings growth that we're delivering. As expected, profits from sales were lower, reflecting the impacts of our successful sales program on reducing our regs portfolio as we continue our strategic focus on growing recurring rental income.
Sales pricing remained robust, with sales in the period within 0.2% of September valuations. Overheads increased by 5%, driven by wage inflation. IFRS profits were down, reflecting the one-off impact of the removal of MDR relief. Looking now at the moving parts of the 11% increase of our net rent for the year. The leasing of our pipeline launches has added GBP 3.2 million. Strong like-for-like rental growth of 8% added a further GBP 3.4 million. Our asset recycling program offset this growth by GBP 1.4 million, and for the second half, we'd expect net debt to be slightly higher than the first. Looking at the valuation. Our portfolio valuation was down 0.3% before the impact of MDR, with the continued theme of outward yield shift being offset by rental growth.
6-month ERV growth of 3.7% largely offsets the 18 basis points of outward yield shift that we saw across the PRS portfolio. Our portfolio has been very resilient, as is evidenced by around 60 basis points of outward yield shift cumulatively over the last 18 months, and that would equate to around a 16% valuation reduction. However, strong rental growth has mitigated the majority of this impact, resulting in only a 2.9% fall in valuations pre-MDR over this time period. Looking across our portfolio, we saw a stronger performance in regional PRS, which experienced less yield shift of 15 basis points, and that compares against 25 basis points in the London and the Southeast portfolio. During the period, we had a one-off impact of GBP 59 million resulting from the budget with the removal of MDR.
Stamp duty on transactions grosses up if you buy a large number of properties at once. MDR had been in place until the March budget, which put purchasers of multiple units in the same position as if they bought each property individually. With this now removed, the surcharge on our purchases has increased, and that's seen the average stamp duty assumed in our valuation move from 2.8% to 5%, and London is less affected than the regions due to its higher price point. The details of this change in tax treatment are included in the appendix for you. Valuations via regs have remained resilient, growing by 0.8% in the period. That reflects their attractiveness, given their highly equitized buyers and their unique nature as well. Being valued individually, there's no impact of MDR removal here.
Our EPRA NTA came in at 294p per share, with the MDR impact in the period equating to 8p per share. While not included in our NTA, the mark-to-market asset of our fixed-rate debt currently stands at 15p per share, demonstrating the benefits of our strong level of hedging for the next 5 years. As a reminder, NTA also excludes our reversionary surplus. That's the difference between the market value of our properties and their potential reversion, and that amounts to 24p per share. It also excludes our investments in technology and the value of our scalable operating platform, which will bring significant operating leverage and margin improvement as our pipeline delivers. This chart shows the key movements in NTA over the year.
Pre the MDR impact, NTA was broadly stable, down just 1%, with the additional 8p impact of MDR taking us to 294p. Turning to movements in net debt. Net debt increased to just under GBP 1.5 billion in the half, which saw another period of significant investment in our pipeline, with investment CapEx of GBP 122 million. And this was partly offset by disposals of GBP 69 million, with strong momentum in the sales pipeline. And since the first half, we've delivered an additional GBP 24 million of sales, bringing the total to date of nearly GBP 93 million. Going forward, we'd expect our net debt to be broadly flat in the second half, as we've got a significant sales pipeline, which will fund our committed CapEx. Turning to our balance sheet.
With interest costs fixed in the mid 3% for the next 5 years, and no material refinancing required until 2028, we're in great shape. We have significant liquidity, with GBP 433 million of headroom in our facilities. Our future committed CapEx is lower, at GBP 225 million, reflecting our strong progress on delivery. The nature of our business model means we also generate very strong operational cash flows, which are around GBP 200 million per annum. Pipeline completions are driving significant year-on-year increases in our net rent, and there's a lot more to come. Passing net rents will increase by a further GBP 41 million from here to GBP 147 million as we deliver our committed pipeline, which is an increase of 50% when compared with FY 2023.
As previously mentioned, our committed pipeline has all the funding in place, with interest rates locked in and construction costs fixed. Beyond this, the opportunities in the secured pipeline and the planning and legals give us the potential to increase net rents by another GBP 41 million. As net rental income grows, so will the dividend, as our policy is to distribute 50% of our net rents. If you remember, our strategy from the outset has been to grow rents, simplify and focus, and to build on our experience. Our in-house platform, enabled by our Connect technology, has been designed to scale, growing our rents. Scale for our business means enhanced operating leverage, with compounding benefits in our profitability, simplifying and focus. Given our platform and our investments in technology, we'll materially grow our net margins through leveraging our central costs and driving operating efficiencies. That's building on our experience.
With this, we expect our EBITDA margins to grow to over 60% over the next 5 years as we deliver our pipeline. With great visibility on the net rental income to be delivered by the pipeline, we see strong near-term earnings growth, with an upgraded EPRA earnings target of GBP 55 million by FY 2026. We see strong compounding earnings growth for the years to come. We continue to see a medium-term total return outlook of 8% post the delivery of the secured pipeline, and that's assuming constant yields. As we've said for some time, as our pipeline delivers our sizable growth in net rent, it's a natural progression for our business to convert into a REIT, and this will remove any corporation tax on our PRS income and grow our returns by around 50 basis points per annum.
While we've already met the 75% REITs asset test, it's the 75% of profits test, which is our focus, given the large profitability of our regulated tenancy sales. We remain on track for conversion in October 2025, and we're well underway in positioning the business to deliver this transition. Now, turning to ESG. We continue to progress and develop our ESG reporting and financial integration, adopting a data-driven approach, which informs our strategy and our business planning. Following our full Scope 3 baseline being measured and independently verified last year, we're driving performance in this area. Our Net Zero pathway has been expanded and published to include Scope 3 emissions, and we're working towards establishing science-based emissions reduction targets this year.
We're progressing with our operational carbon reduction initiatives, including our ongoing asset refurbishments and our Living a Greener Life program, and that influences our customer behavior and their energy usage, which is part of our Scope 3. We've completed our embodied carbon baseline assessments on all direct development schemes. That's the first step in our ambitious target to reduce embodied carbon in development by 40% by 2030. A reminder, this reduction is before the impact of any offsetting. To summarize, we continue to deliver very strong operational performance with net rents and dividend per share, both up 11%. Our liquidity and our balance sheet are strong, giving us the flexibility through disposals to manage our debt as we reinvest into our committed pipeline.
We continue to deliver strong EPRA earnings growth up 12%, with an upgraded EPRA earnings target of GBP 55 million in FY 2026, and that's supported by our committed pipeline, our platform efficiencies, and our low fixed debt costs. This earnings growth is a major component of our medium-term total returns target of 8%, and that remains unchanged. So the business is in great shape, with an excellent pipeline that will continue to deliver strong compounding growth for many years to come. And with that, I'll now hand you back to Helen.
Thank you, Rob. Let me move on to our market fundamentals and some insights on our operational platform, including how we're harnessing technology and AI, and of course, our new openings. The U.K. housing market has been marked for decades by a failure to build enough homes.... Meeting the government's 300,000 homes per annum target appears further away than ever. The U.K. has one of the worst ratios of space per person. It's worse than Japan, and it's a little more than half the space that Americans have. Controversy over planning and land use and viability has led to new consents falling dramatically since 2019, meaning that the problem of undersupply will not resolve soon. Build-to-rent still remains a small part of the U.K. residential market, but it has significant scope to grow.
Now, the strength in rental growth has caused some to question customer affordability, and as a reminder, the majority of Grainger's customers are between early twenties and early forties, an age when usually salaries are growing ahead of general inflation. We know that on average, our customers spend 28% of their household income on rent, which is affordable and unchanged from last year. In addition, our homes are very energy efficient. 93% of Grainger homes are EPC A to C, which compares to less than 50% of the rental market as a whole. But this also means that our customers have affordable energy bills, keeping down their overall cost of occupation. While the current rental supply and demand imbalance has moderated slightly, demand is still 15% above the 5-year average, and supply is 16% below.
There is predicted to be demand for 1 million rental homes by 2031, and almost 400,000 of those are in our core demographic of 25- to 34-year-olds. We know that buying a home is more expensive than renting, and that's before all the additional costs of repairs, insurance, et cetera. While the residential rental sector is attractive and resilient in investment terms, Grainger remains in a leadership position, and the average portfolio size for build to rent investors in the UK is around 525 homes. Now, both main political parties support more residential development. Both leaders referred to housing in their conference speeches, and while the Conservatives have traditionally focused on home ownership, they and Labour have advocated for housing of all tenures.
As the Rental Reform Bill progresses through Parliament, our conversations with politicians confirm both parties are supportive of encouraging good landlords, increasing supply, and rejecting rent controls. We continue to be the leading residential platform in the UK. This supports our growth in our income, and as we scale, we create greater efficiencies. In a B2C environment, a good operations platform is a key barrier to entry, and on this slide are just four aspects of our continually improving platform. Leasing. This we took in-house just prior to the pandemic. It gives us greater insight into our customers, it reduces costs, and it helps us to build relationship with our communities quickly. Clustering helps to reduce operational costs, build our brand locally, and it enhances our customer experience.
Scaling our operations enables us to buy well and competitively in furniture and white goods, and to be more responsive on repairs. This is all ensuring overall we provide better customer service. Our asset managers undertake asset hierarchy reviews, they initiate refurbishments and repositionings, and they help our operations team deliver additional growth. This reposition has delivered additional returns in some of our older properties. For example, adjacent to the new Nine Elms Station, following the Northern Line extension, we had a continual refurbishment program, which repositions not only the block, but the rent roll. As a B2C business, we have always recognized the power of data and analytics. The power of our leading platform and internalizing many of our functions means that we have a deep understanding of our customers and a rich supply of data.
Our integrated business model, Connect technology platform, and data and analytics provides us an enormous opportunity to drive value, efficiencies, and better service. While only just beginning to explore the applications of AI across our business, AI presents a really exciting opportunity for us, and here are just a few early examples. In our leasing, it helps us to target and direct resources. In our net zero carbon journey, we're analyzing performance and piloting low carbon technologies. In our supply chain, we're using digital live bookings and improving customer experience. And in our procurement, we're delivering best value through spend and product performance analysis. So this is a very exciting time for us, as our operating platform provides sufficient data to deliver better performance and better returns. Our commitment to research remains with rigorous analysis of investment fundamentals and an annual review of investment locations, leading to robust underwriting.
This chart of our investment methodology is one you've seen before, and it continues to help us maintain our strategic focus on the most suitable and high-growth build-to-rent markets. We have multiple routes for further growth, and these different routes have different CapEx and income profiles. Stabilized acquisitions, either single asset or portfolios, give immediate income return. Their earnings accretive from day one. Their speed to acquisition is largely dependent on the age of the asset, and they sometimes give us opportunities to reposition and add the Grainger sparkle. Forward funding has been Grainger's traditional route to growth, bearing in mind the lack of stabilized stock. This route has the advantage of the influence that we have on the specification and oversight during its build period. However, there's usually a minimum of two years from the commitment to the first income flow, flowing.
An example of this would be Millwrights in Bristol. Finally, our longer-term direct development and partnerships. Again, we have control over the product, and in the case of direct development, we have control over the timing. We are rewarded with additional returns, but the time period is usually 3-4 years. Our operational clusters are growing, and with them, the opportunity for greater cost efficiency. And so to our new launches. Copperworks, that's our first scheme in Wales. 307 homes with a launch in February of this year. It's in Cardiff City Center, but it's got superb rooftop views over Cardiff Bay, and it's already leasing well. Millwrights, our scheme in Bristol, part of our latest operational cluster with Hawkins & George. This is 231 homes launching next month, but already with strong pre-let interest. And Silver Yard, also launching next month.
It's our second build-to-rent development in Birmingham, and the Silver Yard provides 375 new high-quality homes at Exchange Square in the heart of the city. Residents can enjoy the additional benefits of 8,500 sq ft of amenity and co-working space. Windlass Phase 2, the next phase of our successful established Windlass apartments. With our final phase of our Newbury scheme, this makes over 1,000 homes in full year 2024. All great additions to the Grainger portfolio. The brilliantly talented team at Grainger have an exceptional commitment to renting homes and enriching lives. Our core values drive our approach to our colleagues and to our customers. Every home matters, people at the heart, exceeding expectations, leading the way. We are conscious we're building communities. Our Grainger communities in core cities build enduring partnerships and anchor our communities further.
We undertook 320 residential community events so far this year. We know that our customer base is diverse. We provide homes to those earning average wages. 18% work in education or healthcare, and they're a young and engaged demographic. As an operational business, we seek to reflect the society we serve, and I'm pleased at the progress we are making with strong female representation across the business and the good progress we're making to the National Equality Standard, which is the platinum standard and rare for property companies. In summary, we have a compelling investment case. We are delivering compounding growth and dividend, and it's strong and stable. We are in a great market with strong fundamentals, and we're the leader in that market with the largest portfolio and the largest pipeline. We have an exciting market opportunity.
The outlook for Grainger, our customers, our colleagues, and our shareholders is great. Thank you. I'll now ask you to ask us some questions. I'll be joined by Rob, our CFO; Mike Keaveney, our Director of Land and Development; and Eliza Pattinson, our Director of Operations and Asset Management. We've got other senior leaders in the room. Anyone listening in, you can submit questions via the webcast or email Kurt, and I'll take some questions. Want to join me?
Hi, Sam Knott from Kolytics. Thanks for the presentation. Just two, maybe. First of all, so it looks like you have made, you know, good progress and are guiding to that GBP 55 million EPRA earnings for 2026, compared to, I think it was about GBP 25 million in 2022. And a large part of that is due to the fixed cost of debt, which you sort of well hedged back in the past. Just doing some back-of-the-envelope math, you have sort of GBP 1.5 billion of debt at 3%-ish, and when that rolls off, when the hedges roll off, if you have to refinance, maybe it'd be closer to 6%. And so that's about a GBP 45 million overhang on earnings. My question is just: What's the timing of that flowing through?
When do the hedges roll off, and how do you avoid that 45 bringing the 55 back down to sort of 22 levels?
... Yeah, I can certainly take that question. So you're absolutely right in highlighting we're very well protected against rising rates over the next 5 years. In fact, we are practically fully fixed over that period in the mid-3s. So we're very well insulated, and we don't have any material refinancing until 2028 as well. So we're in a very strong position from that point of view. And really, I suppose that gives us quite valuable optionality. We've got very strong operational cash flows. We are netting around GBP 200 million+ through sales each year, and what that means is if indeed interest rates do settle for a higher, longer period over those sort of 5 years and beyond, then we've got plenty of time to manage our debt levels accordingly to that scenario.
Okay, so the hedges don't roll off until 2029, you're saying?
Yes.
Then, in fact, that was my other question on the operating cash flow. You quote GBP 200 million on, I think, slide 3, but your finances for this year have GBP 36 million for the half year. I'm just wondering the difference in definition of the net cash from operating activities and operating cash flows. Are you including, if you're including sales in that GBP 200 million, how consistent is that going forward?
Yeah. So if you look on in slide 16 of the pack, we define operating cash flow there. Typically, operating cash flows are more second half weighted than the first. The operating cash flows in the first half are obviously set out there as GBP 84 million, including the disposals. But typically, if you look at the past disposals, with some seasonality, they do tend to tick up during the second half of the year. And if you look over the course of the last couple of years, we've been pretty consistent around that GBP 200 million level. Sales are continuing to perform very strongly. We're selling within 0.2% of previous valuations on the regs, and market demand remains very healthy for our sales.
Okay, and to be clear, so that's including disposals but not acquisitions, so it's-
That's, that's right. Yes. Yeah, so we're, we're effectively. With our committed CapEx, that's come down quite materially.
Mm-hmm.
If you look over the last 12 months, that was up, closer to GBP 500 million.
Yeah.
That's now down at GBP 225 million, and that's over the next three years, largely phased over the next couple, though. So you can start to see how operational cash inflows versus the investment activities are coming into balance, which is why we say we wouldn't expect any material increases in our net debt from this position.
Okay. Thank you.
Yes.
Good morning, Neil Green from JP Morgan. Just one from me. You've made a couple of comments in the press release and the presentation around the growing number of opportunities you're seeing in the market. Just wondering if you'd give any more detail on that. Obviously, the standing portfolios that you're seeing as opposed to forward funding, as opposed to land. Maybe some additional comments, and that would be very helpful, please.
Yeah. So, in terms of what we're seeing, I think what we're showing in the slide is the fact that we anticipate this. We're not actually seeing lots of portfolios. I mean, this sector has performed so well for the people that own it compared to other sectors. But we do anticipate that there will be more sort of portfolios and individual assets coming to the market. But they're still, you know, quite rare, if you like, at the moment. But it's just our view of life that over time, we will see more coming through.
Chris?
Thank you. Chris Millington, Deutsche Bank. Just a quick follow-up from the last question: Is there much yield variance between the different routes to market as you see it at the moment? I understand there's not a lot of product on the market, but is there much variance there?
Yeah, I think the way we look at it is there's sort of stable- stabilized yield, if you like, and they're all, they're all very similar. I don't know whether Mike wants to say anything about this, but, having dealt with the forward, forward funding, we obviously take a profit, and that was what I was alluding to, if we directly develop ourselves, but the yields are all very, very similar.
I would agree with Helen.
Thank you. Next one's just about the clustering and the benefit it brings to the Gross to Net. I'm just curious about, if we look at Bristol in isolation, where would the Gross to Net be on that? 'Cause it does look like there's a little bit of progress coming through at the group level.
I'm gonna turn to Eliza in a second, not to talk particularly about Bristol, but just in terms of the efficiencies of gross to net. On the practical side, it means that we share management, for example, so you've got senior leadership within the locality, and we add more people to it. It gives us greater flexibility as we run in operational clusters. But, Eliza, do you want to talk about the progress on gross to net?
So as you can see, we're definitely progressing from 25.5 to what we believe we'll get to 25%. And that's definitely through having our clusters, as Helen quite rightly says there. We're, we're now able to share resources across the clusters, which helps on Gross to Net, and also starting to procure, and that might be you procure more locally for some things within a cluster or just the pure economies of scale as well.
Okay. Thank you. Last one's just... It might be for Rob, I think, is just the underlying assumptions behind that 8% TAR ROA number you talk about.
... Yes, yeah. So there's a few factors, but the first thing is we've seen constant yields in that guidance, is post the build out of the secured pipeline. So effectively, what's driving those returns is scaling up. We assumed the long-term average underlying rental growth at 3.5%. Although, of course, at the moment we are significantly ahead of that. And then, of course, the running yield. There's a 50 basis points pickup from converting to a REIT, which obviously now we're highlighting is FY 2026 and reconfirming that. And then some modest profit from developments as well. So those are the key components of that. But we see that as a very, you know, low volatility return. You know, the business is really transitioning towards recurring rental income.
It's making up a much greater proportion of our results. So, yes, 8% return at low volatility.
That's helpful. Thank you.
Tim.
Hi, morning, Tim Leckie from Panmure. I thought that, excuse me, the EBITDA margin was really interesting. I don't think you've explicitly mentioned that before. I must admit, I haven't read all 70-odd pages yet. I don't think it's broken down in there, the full equation. Is it? Do we take the NRI, the profit from sales, remaining CHRM and fees, and is that what we then apply the 53-60? And then as a follow-up, it might be too early days, but what is the? If you get to the top of the hill, so to speak, at 60, what does the path forward from the top of the hill at 60 look like? Can you go further?
Yeah. I'm happy to, to take that, Tim. So you're absolutely right in terms of the elements of the equation, less the overheads, of course, as, as well. And it's really that which is driving the, the significant step up that we see. So it's, it's the fact that we've invested very heavily in technology with our Connect platform, and that means that we're not having to add lots of central heads to support this very strong growth in, in, in the top line. So effectively, we've got wage inflation coming through, but otherwise, the central costs are being tightly controlled. Eliza described the efficiencies that we're seeing in terms of gross to net and, and the economies of scale.
But the biggest part is the kind of operating leverage within the business, leveraging that central base, because the platform has been designed with scaling in mind. So that takes us to something that we see as over 60% in the next five years. If you look at the large-scale U.S. players, they actually are typically operating in the sort of early- to mid-60s. So we actually are driving a significant level of efficiency out of this, but we do equally see, I guess, the opportunity for a bit more to come beyond that as well. But we are starting to really drive scale efficiencies and have been doing for some time.
I mean, it seems like an awful lot of additional earnings. I don't like doing this in public so much. I'd rather make my bad math in private, but GBP 70 million × 2 is GBP 140 million on 7%. That's a decent chunk of change coming down to the bottom line. That's, that's correct, isn't it?
Yes.
Okay.
Your math on that is absolutely correct.
Wow, that's a first. Thank you. That's a big number.
Jane, oh, James.
Thanks. Thanks for the presentation. It's James Carswell from Peel Hunt. Just on the new acquisitions and the opportunities you're seeing, I'd just be interested to hear how you're thinking about potentially funding that. And obviously, you've got. We've talked on debt and the kind of marginal costs. Equity is obviously an option. Would you also consider JV partners and maybe more kind of recycling of capital? I appreciate you've got the regulated disposals-
Yeah
... which are coming anyway.
I think, I think the thing that's. That's a good question, James. I think the thing that is rarely seen, and we didn't bring it to the front of the pack this time, is GBP 730 million of regs, but of course, that's at investment value. Actually, we've got the profit on those regs as well. So, you know, as we recycle out of that, that's about 24 pence a share. It's a couple of hundred million of additional revenues through there. We've also got other non-core assets. So our options are asset recycling, joint ventures. The phone rings every week because of our operating platform. Would we like to do joint ventures?
We have always prioritized our own shareholders above that, on the basis that, you know, this operating platform is a real barrier to entry, and so we've been very careful on showing that. But of course, we have joint ventures with landowners for such as the Defense Estates and also TfL. And then the third one is equity, and we've been very disciplined over the years on raising equity. But if we saw compelling opportunities, I think our shareholders would be supportive of that.
Sorry. Sorry, Celine.
Good morning, Helen. Celine Soo-Huynh from Barclays. I just have a question on your like-for-like rental growth, 8%. It's similar levels to what we've seen last year. Some experts have been talking about rental growth decelerating towards 4, 4.5, 5% this year for the UK market, but we're still not seeing that for your numbers. And we're already halfway through the half year. So can you comment whether you agree with the 4%-5% like-for-like rental growth forecast, and how we should think about your like-for-like going forward? Thank you.
Yeah, it's a great question. One of the things that I always say is that rental growth is very much attuned to ability to pay, so has a strong correlation with wage inflation. Long term, over the very long term, 3%-3.5% rental growth has been the norm. We do feel that it will remain above historical averages for some time just because of that supply and demand imbalance, and also the affordability within our occupiers. So I think we expect it to be ahead of the 3%-3.5%, but we do expect it to come down as inflation and wage inflation, in particular, comes down. So it is, you know, two very, very strong years. Any other questions in the room?
If not, I'll ask Kurt to sort of go to the webcast.
We do have one on the webcast. It's from Steve Bramley- Jackson at HSBC. It's regarding political and regulatory risks. So Steve says, "You state that you've been in dialogue with both major political parties, and you don't foresee significant issues, irrespective of which party governs. However, do you see the potential for rent caps being introduced in England, a greater possibility under a Labour government?
It's quite interesting 'cause this week, a part of the Labour Party, and it's not central policy manifesto, produced a report that looked at the potential for rent caps, and immediately, the leadership of the party came out and said, "We do not support rent controls. It's not our policy." So it's quite helpful. I think we put the quote on the slide there. I think the interventions in the market, bearing in mind 98% of it is small buy-to-let landlords, would be very detrimental to supply, and I think that what we've got is both parties recognizing that. I think what we might see under a Labour government is an acceleration of house building, supporting the bottom of the rental market.
In other words, the sort of real challenged affordability area, stimulating that, but that's not our market. Our, you know, sort of core demographic is much stronger than that.
That's it for the webcast.
Did my mum not get mine?
Any other questions? No. Well, thank you so much for spending time with us, this morning. If there are any further questions, please reach out to Rob, Kurt, or I, and we'll look forward to seeing you and talking to you afterwards. Thank you.