Good morning, everyone, and welcome to Grainger's half-year results. Rob and I are really looking forward to presenting these to you. The company is in a strong position, and we've delivered a particularly strong set of results. This performance is ahead of our plan that I set out six years ago, and we are now delivering our pipeline at pace. At the end of last year, I told you we had been resilient throughout the pandemic and have recovered swiftly, and we're now ahead of pre-pandemic on all key measures. This strong growth in the first half is principally driven by two factors, the delivery of our pipeline and the leasing ahead of plan.
The agenda this morning is that I'll take you through the highlights, and in particular, I'll cover the strong results driven by openings and lettings, the operational progress across all areas, and how our pipeline is delivering and expanding, and the strong structural growth for the sector and for our business. Rob Hudson, our CFO, will take you through the financial review, and he'll also give you greater detail on how our pipeline translates into earnings and returns, while also explaining our valuation growth, the impacts of inflation on Grainger, and how we see this business delivering sustainable high single-digit returns. I'll then update you on the market, and we'll give you more insight on our customers, our competitive advantage, the growth in our market, and our new acquisitions.
We'll have an opportunity for questions, and there's a number of the Grainger senior leadership team in the room today to help with these. This first half, we have delivered a strong performance. Our net rental income has grown by 23%. Our like-for-like rental growth is 3.5%, and I had predicted last results that by the end of the full year, we would be at pre-pandemic occupancy levels. In fact, we achieved that in March. This result has been driven through a combination of the momentum we maintained throughout the pandemic in developing our pipeline and the changes that we made this time last year to develop in-house our own leasing team and to enhance our leasing team with our CONNECT technology, enabling us to respond swiftly to the market, both in terms of product offering and price.
Our new schemes are attracting strong customer interest and are leasing up well ahead of plan. Our operational portfolio is now GBP 3.1 billion, and we have a pipeline of a further GBP 2.4 billion, and more than GBP 1 billion of that is secured, and most of that is already on site. This will enable us to deliver 10,000 new homes. This is a business that performs better at scale. We are able to enhance returns for shareholders and also to enhance our customer offer. We continue to drive returns for shareholders. Our adjusted earnings for the first half were up 23% at GBP 46.3 million. Our net rental income is up 23% at GBP 42.8 million. We have delivered schemes with GBP 16 million of passing net rental income in the last 12 months.
Our like-for-like growth is 3.5%, which is 3.7% for our reversionary portfolio, 3.5% for our PRS portfolio. This has been reflected in our first half valuation uplift of GBP 79 million on our EPRA NTA, which is 305 pence per share, up 3% for the half year and 7% in the year. Our interim dividend is up 14% to 2.08 pence per share, and our residential sales profit is up 7% from our regulated properties, and we sold these at 3.6% above the September valuation. Our operational PRS portfolio is now GBP 2.2 billion, which is 71% of our portfolio, and we continue to invest in our customer experience.
Following consultation with the government, Build to Rent was excluded from the building safety repairs pledge and Residential Property Developer Tax. Our New London assets at Apex Gardens and Windlass Apartments, which launched in late summer last year, are now fully stabilized. Our new launch at Pin Yard in Leeds is 65% leased in just seven weeks. We have five completions in total due in 2022, and with the expectation that we will deliver accelerated growth in net rental income over the next two years. We've made good progress on our TfL portfolio, with five schemes now having achieved planning consent. In a moment, I'll take you through our pipeline, where we have over GBP 1 billion in the secured pipeline and 12 out of the 16 are on fixed-price secured construction contracts. Grainger is a socially responsible business.
We know that the provision of high quality, well-run mid-market rental homes in a country with an acute housing shortage is a socially responsible thing to do. Our commitment to making a difference in people's lives goes much further than the provision of new homes through our customer and community engagement programs and raising the standards of renting to enable customers to live a greener life. We've highlighted here just some of the progress that we've made in the first half. 87% of our PRS portfolio has an EPC rating of A to C, and we continue to make progress well ahead of the regulations that are expected to come into force in 2025, 2026. We're now on 100% renewable green energy contracts for our landlord supplies.
Our discounted and affordable housing program, which is delivered through our main portfolio and Grainger Trust, is now approaching 1,000 homes. This year, we have established a board-level responsible business committee to give further focus to our commitment to making a positive social and environmental impact. We have launched our customer initiative of Living a Greener Life, and we are committed to helping our residents with greener buildings, operational practices, help and advice. Our carbon emissions reduction program is on track. We have a clear strategy for Scope 1 and Scope 2, and we're making good progress. Scope 3 is underway, and we have engaged the whole business in our program of Living a Greener Life, which includes our resident engagement program to reduce Scope 3 emissions. I am pleased to say that Grainger's diversity and inclusion program is accelerating.
As we continue to attract a diverse range of talent, it is important that we nurture this, which is why we've created our Diverse Talent Acceleration program with the first cohort identified this year. Our work continues to be recognized by many benchmarks, awards, and endorsement from the EPRA Gold Award to ISS Prime Rating. Like many companies, we have been appalled by the war in the Ukraine, and I am pleased to say that the business and our employees have taken action. We have made a commitment to provide a suite of homes at our Poppy Apartments scheme, rent-free for a year for fleeing families, helping them to create a small community in a new country. We have a very clear strategy, and our exceptional performance of delivering on our strategy is down to the design, the strength, and the value of our operating model.
The whole business is focused on great homes. In origination, our development team have 12 schemes on site, and in the first half, they have secured three other land sites and taken six schemes successfully through the London planning system. Our investment team has 11 schemes in planning and legals, has successfully implemented GBP 35 million of asset recycling, have attracted an outer pipeline of almost 3,000 homes, and implemented a program of adding value to our older stock. We continue to attract talent to this high-performing team. Our operational team have delivered the lease-up and the renewals while also harnessing new technology through our CONNECT platform and new ways of working to enhance our customer journey. This platform is unique in the U.K. It adds real value to our business and to our shareholders' returns. Now to our pipeline.
Later, Rob is going to give you more detail on how this translates to exceptional earning growth in the future. Our operational portfolio is GBP 3.1 billion. Our regulated portfolio is now less than GBP 1 billion, with our PRS portfolio at just under GBP 2.2 billion. Last year was a strong year of delivery for us, which has driven rental growth this year, but this year is also a strong year of delivery. In March, we delivered our Pin Yard scheme in Leeds, which is a further 216 homes in our Leeds cluster, where we now have three major schemes, and we're planning to hold a capital markets day in Leeds in June. Later this month in Birmingham, we will launch our Gilders Yard scheme, and we have launched the first phase of Weavers' Yard, Newbury.
This development, which is going to be delivered in a number of phases, it's a great location immediately next to the railway station. Towards the end of this year, we have our second scheme in Milton Keynes, a further 261 homes at Enigma Square, and the Copperworks in Cardiff, which is 307 homes. Together, these schemes will deliver a further GBP 30 million of net rental income. In the first half, we've secured new investment opportunities in Exeter, Sheffield, London, and another 881 homes added to the PRS pipeline. We've achieved planning consent on six schemes in London, five with TfL and one in Lewisham. London is one of the most challenging cities to gain consent, but the demand for rental homes is consistently strong.
In total, we have a further 16 schemes of which the majority are on fixed price contracts and are already on site and underway. We have delivered a good performance in the first half, and this has led to strong capital growth. The sector as a whole has proved itself resilient with good growth potential. It's also worth reflecting that there are five key reasons why the PRS sector is attracting investment capital, and these are the fundamentals of structural growth. There remains a strong demand, and while a lot is talked about new supply, there are still only 1.4% of the 5 million private rental households in the U.K. that are Build to Rent households, and that's around 73,000 homes. Rental growth has been strong in the sector, and occupancy has proved resilient. Our occupancy is 98%.
Our like-for-like rental growth is 3.5%. There is increasing price tension and potential for further rental growth. Consumers are attracted to the professionalization of the sector with small landlords exiting and being unable to compete in the same way as the larger landlords at a point where consumers are expecting greater value in terms of money and better service. There is an expectation of yield compression. The sector still looks inexpensive, particularly if you compare London yields with the major international cities, but also our regional cities offer good risk-adjusted returns compared to their European counterparts. GBP 4.3 billion of new capital was invested into the market in 2021. We expect strong demand to continue as the UK market matures and this market is differentiated from the European market by having a more supportive regulatory environment.
While we have new entrants to our sector, we remain the market leader. We are the largest listed owner operator, but we also have the longest track record, the largest pipeline, and an unrivaled platform. We have a scalable platform which is throughout the U.K., and this national platform is driving compounded earnings growth, delivering material net margin growth, and is a key competitive advantage to enable us to grow quicker. Our pipeline for growth is significant and is secured. GBP 1 billion of our GBP 2.4 billion pipeline is fully secured, and we have a proven track record of outperforming our underwriting. Our secured pipeline is fully funded, and we have capacity to grow, and there is always the option to accelerate our regulated tenancy sales. We have delivered a very strong first half, and our secured plan for further growth is accelerating.
I'll now hand over to Rob, who will take you through the details of our performance.
Thank you, Helen, and good morning, everybody. Today I'm going to cover off the key financial highlights for the first half, and also given the strength and the visibility of our secured pipeline, I'm also going to provide you with some color over the growth potential this brings for both our earnings and our returns. Turning to the financial highlights. We've delivered a particularly strong set of results in the first half. Our pipeline and our lettings performance have generated an acceleration in both our occupancy and growth over the period. Net rents increased by 23%, reflecting the letting up of our 2021 launches, good levels of like-for-like rental growth, and our record levels of occupancy. Adjusted earnings were also up 23% as a result of the performance in net rents and also the continued strong delivery of residential sales in the period.
With this, our interim dividend was up 14% in the half. That reflects the impact of the September placing and our strong underlying performance. Profit before tax was up 122%. That reflects valuation growth from yield shift from scheme lease up, our performance on disposals, and also residential market strength. With this, our TPR for the six months accelerated to 3.8%. TAR grew to 3.2%. Our EPRA NTA was up 3% in the half and 7% over the last 12 months. The balance sheet remains in great shape with LTV at 31%, reflecting ongoing reinvestments into our pipeline. Overall, we've delivered a strong set of results with the business very well placed to grow in the year ahead. Turning now to the income statement.
Adjusted earnings were up 23% in the half, reflecting strong rental growth and continued strength in residential sales. The recovery in occupancy during the second half of last year continued at pace and now stands at 98%. At the start of the year, we guided to a recovery in rental growth to our pre-pandemic levels of 3%-3.5% for the year. I'm pleased to say we've already delivered at the upper end of that range with like-for-like rental growth of 3.5% in the period. We saw little variation in both rental growth and occupancy levels between London and the regions.
Stabilized gross to net was 25.5%, improved from 27% in the same period last year, reflecting our reduction in voids and strong cost control. We've continued to deliver a strong sales performance with residential profits up 7% in the half. Looking ahead at our sales program, we continue to see a strong pipeline of disposals into the remainder of FY 2022, and expect to make a similar quantum of sales profits for FY 2022 as we did for FY 2021. As a Build to Rent business, the government has recently confirmed we're outside the scope of the Residential Property Developer Tax and building safety repairs pledge. Health and safety remains a key focus for this business. As our high-rise portfolio has predominantly been constructed post-Grenfell, we've very little fire safety issues on these assets.
We've invested in remediation and have already taken any associated costs through our valuations over the last couple of years. We've also performed an extensive review of our historic exited developments over the last 30 years. During the half, we've taken a full provision of GBP 9 million for legacy fire safety matters on these schemes as an exceptional item. Where appropriate, we're seeking recoveries from both contractors and insurers, which may reduce the overall liability over time. Turning now to movements in net rental income. Net rent was GBP 8 million ahead of the prior half, with outstanding growth of 23%, reflecting the letting up of our FY 2021 launches, the rapid recovery of our occupancy to record levels, and the like-for-like rental growth of 3.5%. PRS rental growth was also 3.5%.
This was made up of 4.4% growth from new lets and 2.7% on renewals. Overall, net rent for the half was GBP 43 million. The new launches in FY 2022 are largely weighted towards the back end of the year, with the majority of the impact therefore benefiting FY 2023. With this, I'd expect a similar run rate for the second half of the year, with rental growth and disposals broadly offsetting one another. Turning now to the valuation summary. Overall, we delivered valuation growth of GBP 79 million in the half. That's up 2.3%. The ongoing delivery of our strategy means that PRS has now grown to 71% of the operational portfolio. PRS valuations were up 2.1% in the half, with the majority of PRS assets being valued on a rent and yield basis.
Growth was driven through the delivery of our pipeline, the lease-up of our new launches, together with yield compression of around 10 basis points on recently delivered schemes in both London and the regions. ERVs grew by 1.3%. REGs have now reduced to 29% of the operational portfolio, and the majority of our REGs are based in London and the South East, where HPI has been more muted. We saw good growth in the regions of 5.4%. Overall, REGs were up 3.2% in the half. This slide sets out the EPRA NAV measures. We consider EPRA NTA the most relevant measure for Grainger. The 3% increase in the half to 305p is driven by the strong growth in valuations.
The reversionary surplus in our portfolio is excluded from this measure, and it's still a significant amount at GBP 242 million, which equates to about GBP 0.33 per share. Also, a further reminder that our NTA also excludes the value of our platform and our technology, as well as our pipeline. This chart shows the key movements in NTA over the year. Rental income and valuations continue to be the key drivers of growth in NTA. With this, our EPRA NTA was up 3% in the half. It comes off an EPRA NTA growth of 4% in the prior six months, delivering 7% growth over the last year. Our net debt closed the half modestly higher at GBP 1.1 billion.
Our operating cash flows remain strong at GBP 54 million, and we continue to invest heavily in our pipeline as we accelerate our growth with GBP 151 million invested during the half. We're focused on maintaining a low risk, flexible capital structure supporting the business and its growth ambitions. A key action that we've delivered during the first half was raising new bank finance, extending maturities, and reducing our fully drawn cost of debt. LTV remains in the low 30s. We maintain our approach to having our committed CapEx fully funded. Were we to include this committed CapEx, LTV would be 40% within our stated 40%-45% range. Our cost of debt remains consistent at 3.1%, reflecting that we've only minimal exposure to interest rate rises on our current debt.
Nearly 100% of our variable rate debt is fully hedged, and our weighted average debt maturity is 6.2 years. We have no significant debt maturities until August 2024. Despite the wider macro uncertainty, over the last couple of months, we successfully raised GBP 150 million of new bank facilities through a combination of both existing and new lenders. These facilities were on the same terms as our existing RCFs, so lowering our average cost of debt over time, which would be 2.9% if fully drawn. We also renewed a couple of our smaller facilities on the same terms as before, supporting our weighted average maturity. As our PRS portfolio continues to grow, we'll further align our debt structure with the growth of our investment assets, diversifying our sources of funding and securing longer term debt.
We're in a good place for funding our ambitious growth strategy. Given the current focus on inflationary issues, I've set out what this means for Grainger across a number of different areas. Overall, we've got a good degree of protection in place. As is clear from the chart, historically, rental growth has closely tracked general cost inflation, with the impact benefiting the business. Our staff costs grow in line with wage inflation and with the benefit of driving operational efficiencies as we scale and leverage use of our technology and our platform. We always seek to fix pricing in our developments, and we've got a good degree of protection in place with 12 out of the 16 of our secured pipeline projects now under fixed price contract.
As I've just set out, our fully funded secured pipeline with near 100% hedging in place gives us good protection against a rising interest rate environment. This slide shows the progression of our passing net rents based on the delivery of our pipeline. Recurring income will form an increasing component of our earnings as we continue to build out our pipeline in line with our strategy. FY 2021 reported rent was GBP 71 million, and the delivery of our pipeline has already grown passing rent to GBP 88 million at the half year. Overall, our secured pipeline nearly doubles this to GBP 140 million, and we've clear line of sight of the delivery of this increase as it's all fully funded and secured.
The opportunities in our planning and legals give us the potential to increase net rents by a further GBP 34 million and now include the four TfL schemes with full planning. We've also given further visibility for the first time of our outer pipeline of schemes under consideration across our business and TfL, which have the potential to add a further GBP 30 million. These additional areas have the potential to near treble rents as a result. As net rental income grows, so will the dividend, as our policy is to distribute 50% of our net rents by way of dividend. The doubling of our rental income delivered by our secured pipeline has been well trailed over recent years. I'm also including some new information for the first time to help the understanding of how this translates to growth in both our earnings and our returns.
The chart bridges our total accounting return for last year of 5.5% to what we see as our sustainable run rate per annum post the delivery of our secured pipeline of 8%. The investment we've made in our in-house operating model, our expertise, and our CONNECT technology means we have a very scalable platform. Our resultant operating leverage means we're able to keep our central investment in overheads to only slightly ahead of inflation each year. That's significantly below our top line growth. Scale therefore not only delivers increased income returns with higher rent from the secured pipeline but also has a compounding benefit on our profitability and our operating efficiency. The delivery of the secured pipeline also enables us to achieve REIT conversion, saving 25% corporation tax on our rental profits. All of this combined will be highly accretive on our earnings.
As you can see from the chart, the delivery of our secured pipeline will grow total returns to around 8% per annum, particularly attractive on a risk-adjusted basis. An increasing component of this will come from income, which will represent a little under half. This assumes capital growth of 3.5% in line with the long-run average, so that's included in both the start and the end points of the chart. The growth in income returns from the delivery of our secured pipeline, the REIT tax savings, as well as the associated capital return from development. Our secured pipeline is already fully funded in line with our policy. The majority of our development contracts are already placed with costs fixed, so delivery risks are relatively minimal.
Finally, all of this excludes any further upsides in both earnings and returns from the delivery of our planning and legals and TfL schemes. It also excludes any upside from further market yield compression. By way of illustration, 5 basis points would add a further 1.5% to our returns. To summarize, we've delivered a particularly strong performance in the first half, and we've seen our momentum further strengthen with strong rental and adjusted earnings growth of 23%. With this, our dividend per share is up 14%. Our valuation gains and returns have increased, reflecting lettings performance, rental growth, and the ongoing strength in investment markets. Our liquidity and our balance sheet are strong, giving us the firepower and the flexibility to continue to grow our PRS portfolio.
We're going into the second half with strong momentum, a strong product offering, an exceptional pipeline of new assets, and our best-in-class operating platform. We're in a good position to capitalize on our near-term opportunities, together with being well-positioned for longer-term growth and an acceleration of our total returns. With that, I'll now hand you back to Helen.
Thank you, Rob. In this section, I will review some of the long-term occupational stats that are underpinning this growth in our market and why the market is continuing to perform. I'll also go through some of the work that we've been doing on researching affordability, our portfolio positioning, and our customer insights and data, and also touch on our new openings and recent acquisitions. Earlier, I talked about the strong structural potential for our sector. It still remains a small part of the private rented sector in the U.K. With 5 million rental households and only 1.4% of that is in Build to Rent households, 73,000 homes, there is a long way for this sector and for Grainger to grow. This is at a time when demand is broadening across all age groups.
The English Housing Survey is showing that although there's a small drop in the under 24s, there is growth in all other areas, and significantly, there is growth in the 35-54 age group, showing that people are renting for longer. We expect this trend to continue as house purchases continue to elude first-time buyers, and this, of course, is likely to get even more challenging as the end of Help to Buy approaches next year. Even if house prices flatten, interest rates have increased. Not only is there significant pent-up demand, a new statistic for you today, 3.6 million 20- to 34-year-olds, which of course is our target age group, are living at home with parents, and that's up 24% in the last decade. There's obviously potential to move into our sector.
Earlier, I explained how we'd achieved our 98% occupancy with our in-house leasing team. The leasing market remains strong, and in fact, data now shows that days to lease have almost halved in the last five years, and that's in the market as a whole. It's hard to see how it can get any stronger. This demand gives us potential to grow rents further, and rental growth has always traditionally followed wage inflation. We have something interesting happening at the moment, which is that wage inflation in our core cohort of young professionals who are developing their careers and achieving salary increases ahead of national wage inflation. All of these factors, occupational factors, are helping to encourage investment into this low risk, resilient sector with high growth potential. Investment in the Build to Rent sector is increasing.
Last year was a record volume in terms of investment with GBP 4.3 billion, but the first quarter of this year is showing us a strong start for the sector. Although there is a long-term track records of rents being closely correlated to inflation over the longer term, rents by most commentators, including Oxford Economics, are expected to outperform inflation from next year. One question I'm asked at the moment is whether or not the economic squeeze on our residents is going to affect their ability to pay increased rents. Knight Frank and Oxford Economics data shows as a proportion of household income, spent on rent and bills, we're still significantly lower than the long-term average, which does give us some cushion.
As a reminder, Grainger focuses on the mid-market in the Build to Rent sector, and in our tenants' assessments, we work on the basis of one-third of income spent on rent. 87% of our homes have an EPC of C or above, and 50% have an EPC of B or above. They are highly energy efficient, and that compares to 2% in the private rented sector as a whole. Our residents are thinking about their total costs of occupation and their bills, but they're also thinking about their gym membership, their broadband, and all of these are included in their rent with Grainger. In the market as a whole, 73.3% of private renters are employed, and this compares to only 59.5% of homeowners. This is because, of course, 35.8% of homeowners are retired.
We have a more resilient cohort living in purpose-built Build to Rent. They are usually working, their salaries are growing, and they're paying around 30% in rent, and they are protected from the worst impacts of rising energy costs. Our success in the sourcing has come from our commitment to using a research-led approach to where we invest and data insights as to what we build and how we operate it. This is our usual slide, and London remains our strongest city, but our portfolio is growing in regional cities, and I'm pleased to say that our new acquisition in Exeter. It was a key target city for us. As we build scale, we continue to enhance our offer and our economies of scale by the creation of regional clusters, and this enables us to manage more efficiently and offer our customers more options in a location.
I mentioned earlier our exceptional leasing performance, and it's worth reflecting how our 2021 launches and our 2022 future launches provide a step change in net rental income for this business. As a reminder, we usually allow a year to 18 months in our underwriting to lease up the schemes depending on the scale. In 2021, we had six new schemes in the portfolio. They're now all fully stabilized and one within three months of opening. Over 1,300 new homes delivering GBP 60 million of passing net rental income. In calendar year 2022, we have five new schemes launching. That's 1,174 homes, and that's another GBP 13 million of net rental income. Two of these schemes have already launched, Pin Yard in Leeds and the first phase of Weavers' Yard in Newbury, and they're already leasing well ahead of underwriting.
We have three further schemes to be launched later in the year, so this is GBP 29 million delivered from our recent launches once they're stabilized. Our customer insights program is invaluable in helping us to understand what our customers are looking for. It drives and informs our business. We connect with our customers through all key events in their leasing, on move in, move out, post repairs, and we gather feedback and we look at reviews. We also undertake quantitative surveys and qualitative focus groups, and this gives us a deep insight into what customers are looking for so that we can design our product and our service. It informs our underwriting, our apartment design, our amenity design, our lease terms, our marketing, our customer experience, and our customer experience enhancement program, which is underway.
Grainger's leadership in the sector in both existing portfolio and pipeline is down to the quality of our portfolio sourcing. I've spoken about our research into where we invest, our analytics into what we invest in, and our advantage is we can source through multiple routes, through land, direct development, forward funding. We have a proven track record, which is important for partners and for landowners, and we have a London- and regional-based teams embedded in local markets. We have experienced and integrated in-house acquisition, development, and operational teams, adding real value to our pipeline. Together, we have sourced over GBP 3 billion, and there's more coming through. In the first half, we secured four schemes using three of our sourcing routes.
To give you a little bit more detail on our acquisitions, at Merrick Place, Southall, we have 401 homes in partnership with Network Homes. This has a full consent. It's a forward funding project, and it's brilliantly located next to a Crossrail station. We acquired a site in Exeter, which will be our first scheme in the city. It's a city with strong leasing fundamentals and extremely constrained supply. Adjacent to our Sheffield scheme, we've bought the land for 250 PRS homes at Brook Place too. Brook Place has been one of our most successful schemes, and Sheffield has been one of our strongest cities.
Finally, I'm pleased to say that after 28 years, we have acquired the remainder of the strategic land in Hampshire from our development partner, enabling us to add another 250 suburban build-to-rent homes, as well as the remaining potential for Grainger Trust affordable homes. In summary, we are accelerating our growth and our returns. We've delivered a very strong first half, and the conditions are attractive for our sector and for Grainger as we deliver. There is upside on rental growth and yield. PRS is a structural growth sector, and there are five key things driving Grainger's success. These are our market leadership, attracting talent and opportunities. Our next stage of growth is locked in, and it's funded, and we have a proven track record of delivery. We have our scalable, high-performing national operating platform.
We are delivering accelerated growth and returns for our shareholders. Thank you. I'm now going to ask you to ask us some questions, and Robert and I will attempt to answer those. For those of you listening in on the webcast, if you have a question, please enter it via the toolbar at the bottom of your screen, and Kurt Mueller will read it out, and we'll answer that.
Morning. Chris Millican at Numis. You very clearly outlined the strength of the market, you know, the discount yields the U.K. is trading on versus some of its continental peers. What do you think we need to see to start getting a little bit of underlying yield compression moving through the UK PRS market? I'll come on with the others afterwards.
Okay. Not sure if this mic's turned on. Yeah. I think the key thing is that we're in a very nascent market at the moment, and what we're not seeing is what we saw in places like Germany and Paris, where you actually see stabilized PRS trading. With only 73,000 homes, very little actually trades. I think the weight of money coming into the sector, once it starts trading, then I think we will see further yield compression. The fundamentals in investment terms are as I said earlier, are very, very strong for the sector. If you think across all real estate sectors, how resilient we've been throughout the pandemic, how diversified the income stream is, and how essential the real estate is to people's lives.
I think it's in terms of risk-adjusted returns, I think we should see some more yield compression.
Next one's just on TfL. Obviously, it's starting to move at pace now. I mean, excuse me. Easy for me to say. When should we expect the first completions coming out of TfL? And can you also just remind us how you expect to structure the JV and finance the JV ultimately as well?
I'm going to. We've got Mike in. Mike's lost his voice, but he will attempt to.
Oh, blimey.
He will attempt to answer this. Mike's our head of land and development. The TfL joint venture is already structured, so we're in good shape on that. Mike, if you can talk about the completions, start on site and completions.
Yeah.
Rob, if you talk about financing.
Apologies for my voice, but generally we're aiming to start on site at the end of this year, accelerating through into 2023. They're schemes of different sizes and complexities, so the first one's landing 2025, 2026. That will be the first rent income from the TfL partnership.
Thank you.
Yeah. I'll talk to the financing point. As you saw within our planning and legals, we now have those four schemes moving into planning and legals, and it's a little under half of the GBP 740 million total investment. You can see just over GBP 300 million in that initial phase. We're financing it through a combination of debt within the JV vehicle, Connected Living London, and then also we'll be injecting funds from Grainger as part of that, and we'll raise that funding in the usual way from all the normal sources through disposals, debt. Then, of course, you know, as part of our funding strategy over time, we do equity raises as well.
Do you think given it's in the JV structure, you'll look to gear it at a higher LTV than the core business?
It will be slightly higher geared than the core business but broadly within our kind of operating parameters, so not materially different.
Next one. Sorry, I'll be quiet after this one.
That's fine.
Is just suburban PRS, you know, whether or not you've had a change in attitude there. You're still very urban aligned, but obviously we've got the Bearwood.
Yeah
Site acquired.
Yeah.
Has there been any change in thought there?
No. I mean, one of the key things for us on suburban PRS is that, if you think about where interest rates have been, and also if you think about the market that we want to enter, we've always been very clear that it should actually be in high value areas where the barriers to homeownership are higher. Which is why we're Surrey, Hampshire, Wiltshire, et cetera, is our sort of main portfolio at the moment. It's been a harder portfolio to enter. There's a lot of money looking at this at the moment, but it's been harder because obviously we compete with the house builders for land.
You know, the good news about the Bearwood acquisition is that gives us the freedom to plan more homes at a site that's been incredibly successful for us.
Thank you.
Thanks, Chris.
Thank you. Morning, all. Kieran Lee at Berenberg. Just a couple from me. In the buildup of total returns that you presented, Rob, there was a REIT conversion element. Are you able to talk more towards timings on that at all?
Yeah, I can certainly talk to that. I suppose a couple of things actually. It's based on what unlocks it is the delivery of the secured pipeline and we provide the timings of the delivery of that within our net rental bridge. You'll see the majority of that is delivered by 2025. Of course, at the year-end, I said we'd convert to REIT within four years, and six months has passed since then. I think we'd expect it to bring it a little under the three and a half years that we're now at.
Perfect. Thank you. Last one from me is on construction cost inflation. I know that a lot of your developments are locked in under fixed price contracts, forward funding agreements, et cetera, but we've seen some peers that use a similar structure report some yield on cost decline. Have you audited your forward funding partners to just check the resilience of those pipelines? Have you seen any differences in likely yield on costs versus initial underwrite?
No. We actually believe we're in a strong position. not just at the moment, but we always do very rigorous checks in terms of the financial health, not only of developers that we work with, but also their principal contractors beneath them as well. not just up front when signing the contract, so we look to work with major contracting partners in good health, but then we also monitor that health on a monthly basis. The finance team works very closely with Mike's development team to have any on the ground intelligence as well. We're not seeing any signs of distress, certainly at the moment.
The other thing to mention as well is because the majority of this is delivered through forward fund contracts, the developers margins that they make are typically 10%, but we back end load that payment and it's not paid until the end of the development. That gives a further degree of buffer as well.
Thank you.
Thank you. I don't get muted this time. That's very good. Morning. It's Sander Bunck at Barclays. Just following on a bit on the construction cost inflation, and obviously understand there's a buffer like forward fund, the double checks and balances. At the same time, the cost price increases across Europe are around 10%-15%. There is no doubt that that is happening. Just how do you mitigate it, or how do the constructors mitigate that impact? I mean, are you able to, for example, pass it through in actual higher rents, so your yield and cost is broadly the same? Or how to think about that?
Slightly related to that, even if the actual construction cost stays the same, do you face any delays? Because I think there's also obviously wide supply chain issues across the globe.
I'll let Rob talk about the sort of pricing, what we're seeing. Because it is shielded by the fact that we've got strong rental growth at the moment. In terms of the supply chain, we did something a few years ago, which I don't know whether people will remember, which we switched a lot of our specification supply chain to a UK market, and we haven't been as badly impacted as others. That was done in response to Brexit as opposed to the situation that we find ourselves in post-pandemic with inventories and the war in Ukraine. That's held us in good stead.
The ingredients as well of our buildings obviously vary, and so although you quoted a figure of between 10% and 15%, in some areas, because of our specification, we're not seeing anything like that. Rob, why don't you talk to how we've got the comfort of growth?
Yes. I guess there's a couple of answers I'd break out, Sander. I think firstly, in terms of the secure pipeline, we do have those contracts locked in. I think to that degree, with rental growth rising, we actually should see some benefits of that as the kind of jaws widen between the two. Where it comes to sort of planning and legals and which are a little bit further out, we have seen a range of inflation. It varies from the nature of the scheme and from location to location, but on average around 10%. Given the time frames involved, we would expect that to be offset by rental growth.
Sure. Okay. Last one. We're seeing German counterparts commenting on the fact that their cost of capital has increased quite significantly, basically because of the interest rate environment and share prices having come down, and as a result, slightly tweaking their investment kind of requirements. Are you in a position where you're saying like, "Look, actually, that's not because we are pretty well capitalized, et cetera. There is no need for us to do that"? Or are you kind of looking with new acquisitions, are you also thinking about that you require a higher yield? Or yeah, kind of how are you thinking about an increased cost of capital world?
Do you want to?
Yes, I can talk to that. I think firstly that, as you say, Sander, we're in a very strong position with respect to funding because our policy is to have all of our secured projects fully funded up front, and we are fixed, and we have quite long maturities. I think that puts us with very clear line of sight over what we're delivering and a good degree of protection. Of course, we've got lots of optionality in terms of our funding as well. It's not only about traditional debt, but we also have disposals, which we can always choose to accelerate. Of course, we have the option for equity as well. We've got lots of means at our disposal.
The other thing to note is as well, and we have some of our lenders in the room today. We have raised new bank finance over the last couple of months, even in this environment, on previous terms. I think, you know, lenders like the story of Grainger, the attractiveness it brings in terms of our growing rent roll, and over time, I think there is the ability to continue to improve our credit rating as well. We see that as a positive dynamic. Nevertheless, you know, in a rising rate environment over time, for some of the longer term projects, we would always consider that in the context of the rental growth and the returns on the projects themselves.
We've not changed our hurdle rates in terms of what we're investing in.
James.
Morning. It's James from Peel Hunt. Just on, I think Slide 21, where you show the building blocks to the total return, the future total return of 8%. I guess the operating efficiency is quite a small part of that kind of story. Obviously there are clear benefits to scale. I'm just wondering why that is quite a small part. Is it because you're effectively assuming improvements in the gross to net, and therefore that net rent bar just comes in higher? So you are getting those efficiencies just in the rent or just in the other block.
Yeah.
Yeah.
Can you just talk a little bit about where you think that gross to net could get to?
Yes. I mean, really in practice, I think you're right to highlight it, James. You do need to look across the two to some degree. We are driving quite strong leverage, particularly as well in our central costs, which is where that's also reflected within the operating efficiency, because our net margins improve, you know, quite substantially over this period because we're only growing overheads broadly in line with inflation, with the little bits of investments on top versus the doubling of the rent over this period. But yeah, you do really need to look across the two.
Where do you think the gross to net leakage could get to over, you know, the medium term? I think it's 25.5% looking backwards.
Yeah. I think we've made a strong recovery on gross to net. This year, 25.5%. I can see that, you know, you should work on a figure just below the 25%. I know that, you know, a lot of our peers that are outsourced are looking at 30%, 31%, 32%. Actually it is one of our competitive advantages of our in-house platform.
Okay. Sure, then. Just one other question if I may. Helen, you mentioned you still have the option of accelerating the sale of the tenanted regulated portfolio.
I'm just wondering, what would make you kind of go down that avenue? Is that something we're quite close to potentially doing, or is that just something?
We do and, you know, if you look at the back of the RNS, James, you can see that we frequently trim the portfolio both in terms of geography. We look at the age of the customer in there to see whether we're likely to get the reversion quite quickly. We put quite a number this year through auctions, and we're receiving very high, you know, sort of almost ERV prices from them, but they're sort of smaller sales. We did a portfolio this year where it was younger sort of tenants in there, so the reversion was further away. We've always had asset recycling as part of it and, you know, we can continue to do that.
There's strong appetite for these portfolios, so it could be a series of portfolios as well.
Okay. Thanks.
Some questions coming through.
Morning, everyone. We've had a few come through online, which I'll read out, some of which have been covered in the room. So apologies for those listening in if I skip over your question, but hopefully they've already been answered. The first one is from Andrew Gill at Jefferies. He was wondering if we are still offering incentives within the portfolio on new lettings and renewals as we did during the pandemic, which is the first part of the question. The second part of the question was, now that rents have recovered in the broader London rental market, do you expect ERV growth and like-for-like rental growth to further accelerate beyond where we are today?
Yeah. I think interestingly, one of the great things about having a direct leasing team is that they are taking direct flows through from inquiries from Rightmove, and we switched off our letting incentives late last summer. Actually we've got the head of our leasing team in the room, and he's nodding. Yes, we switched them off. No, we're not having to give any incentives and haven't done for some time. We said that we would do between 3%-3.5% rental growth this year. We're already at 3.5%, and the momentum's still going. Yes, I can see further ERV growth coming through this year.
Great. Thank you. We've had a couple questions from Miranda and Mike Prew about the timing of REIT conversion, but I think that's been covered. There was a question from Philip Argabant, who was asking about whether or not there's a charge or fee associated with conversions to REITs.
No. The conversion charge was abolished several years ago.
Great. Thank you. Paul Gorey from BMO has the next question. For the development pipeline schemes without fixed price contracts, the remaining four out of 16, what is the likely profitability of these schemes, profit on cost? And how does that compare to what was expected before the current inflationary environment?
I think we've partly answered that by the fact that we've seen rental growth across those schemes as well. We're working on around 10% profit on cost. I think the key thing, and I think this is perhaps where some competitors in the real estate sector have actually been caught out, is to always be on top of a really refreshed cost plan and a current cost plan. Therefore, you know, we're expecting those, that profitability to stay intact because of rental growth, because of yield compression, but also, because we're on top of our cost plans.
Thank you. Final question from Paul Gorey at BMO again. What is the risk of delays on these schemes given the current cost pressures and a lack of willingness of contractors to commit to contracts today? Partially answered before perhaps, but don't know if there's anything to add.
Yeah. I don't know whether Mike wants to add anything on contractors and what we're seeing. I think we're a really good partner for contractors. They can see a long-term pipeline coming out of Grainger. I mean, there's some mainstream contractors that we're on our sixth scheme with now, so we've got some strong relationships. We're not seeing a downturn in appetite of people willing to work for Grainger. Mike, you're in the front line of this.
I totally agree. We're not seeing a downturn in interest in undertaking contracts for Grainger or our joint venture partnerships. Part of that will be because we've refreshed our cost plans, so our expectations are not misaligned with the market.
Great. Thank you. That's everything from online.
Any more questions in the room? I just thank you all for coming. It's so lovely to see everybody in person again. Thank you. Thanks.