EXECUTIVE SUMMARY
We've all been in the same boat - navigating Covid-19 challenges and the globe unanimously wishing for it to go away. Despite the challenges business faced, Eruditus remained resilient and grew 12%. It appears we're at the endgame now with COVID (good riddance!) and looking forward to a bright 2021/2022.
The Covid-19 pandemic spread with alarming speed and along with it came economic uncertainty. The World Bank expects developed economies to shrink by as much as 7%. Nevertheless, Residential rents and tenant demand have remained more stable than sales during past market slumps, new research has confirmed. This increased consistency was seen across both UK and US markets, according to the latest Savills report which looks at how residential rents behave in a downturn.
The research looked at some major past events which have caused economic difficulties. This includes the global financial crisis of 2008, as well as events like the EU referendum in 2016, the run on Northern Rock in 2007 and the dotcom bubble burst in 2000.
The Oxford Economics analysis believes incomes will only fall by 1.6% this year, and this will be followed by a 5.4% rise. Average annual growth will then return, the firm says, to around 3% per year through to 2024. Therefore, in line with macroeconomics we expect larger city rental income, inclusive of Birmingham, to rise up to 15% between 2020 and 2024. (Harvey, 2020).
At Eruditus we had already started implementing a new strategy which has seen us through Covid with ease. Summary of new initiatives include:
Moving further away from traditional letting agents and sourcing our own tenants via SpareRooms and Young Professional Groups on Facebook and alumni links at the University of Birmingham.
Our tenants mix – We have an almost equal mix of young professionals (engineers, Jr doctors, nurses) and Postgrads (PhDs and MSc). Additionally, we’re now tailoring our young professional searches for tenants who can either work from home or are vocationally employed by a public sector organisation i.e. civil service and healthcare.
Using our existing networks to help fill rooms i.e. Deepak Malhi is also General Manager for cancer services across the whole of Birmingham and manages 70+ consultants, 100+ nurses and 100+ Jr Doctors. This network alone has seen most of our rooms go.
Location – Eruditus continues to buy in a prime location which is equidistant from the new Circle Private hospital, The University of Birmingham and The Queen Elizabeth Hospital (all within 1.5miles of each other). Additionally, the houses are a single road into the city center attracting a lot of young professionals. The location by itself provides legacy resilience.
Quality Product – We offer a superior product to our competitors and work at an approximate profit margin of 61%. We could drop rents by 25% and still retain a 48% profit margin.
Overall studies show that during an economic downturn people seek affordable housing solutions and due to the points highlighted above we’re able to offer an alternative to single-let renting.
PORTFOLIO ANALYSIS
Across the portfolio specific to Eruditus (excludes other group properties) the tenants mix across these rooms are as follows:
Our rental resilience comes from the fact that we have approx. 20% of our rooms rented for guaranteed 4 years via our PhD students and we have always focused on tenants who are working in public sector vocational jobs e.g. HS2, Hospital, civil service etc… Despite Covid-19 public service jobs are not going to be at risk unlike those working in retail or for private sector organisations.
Due to the small numbers involved, for now, we meet each tenant ourselves and they have to pass an in-house vetting process. Additionally, we have made our reference checks more stringent by ensuring we have; a least 3 months’ pay slips, an employment contract, evidence of spending habits as well as contacting the previous landlord confirm the tenant pays. For any tenants without at least 2 years of rental history we insist on a guarantor for whom we carry out the relevant checks.
BUSINESS RESILIENCE AND PROFIT MARGINS
Eruditus offers it tenants an all-in cost solution to their rooms, this is inclusive of all bills and includes a gardener and fortnightly cleaner. Even despite this level of service we’re able to operate at a profit margin of 61%.
Our rents range from £90/week through to £135/week by proving a healthy range of rental options we’re able to capture a good range of the market with respect to affordability.
The below shows a rough outline of our profits over the last 4 years and highlights.
We’ve not seen effect of Covid-19 on our ability to rent rooms and even at a worst-case scenario of us losing 25% business due to Covid (assuming rental decreases are the same as the GDP loss) we could still operate at a 48% profit margin.
RISK MITIGATION
Bring Service/Management in house
We’ve begun launching our own letting agency (Live Smart Rental ™). This has come about due to us having to turn away good tenants. Outside of Eruditus Ltd. the group also own Malhi Capital Investments ltd and HJDR properties which have a further 30dwellings for now. Whilst, not relevant to Eruditus Ltd. our brand and approach means those rooms have also been filled with no voids. The website is still in development (livesmartrentals.co.uk) but a more professional look and approach to getting tenants will undoubtedly provide further strength to our business.
In house management has seen overheads be slashed by 12% ultimately helping give our investor higher returns
Tenant Mix
We have an almost equal mix of young professionals (engineers, Jr doctors, nurses) and Postgrads (PhDs and MSc). Additionally, we’re now tailoring our young professional searches for tenants who can either work from home or are vocationally employed by a public sector organisation i.e. civil service and healthcare.
Location
Eruditus continues to buy in a prime location which is equidistant from the new Circle Private hospital, The University of Birmingham and The Queen Elizabeth Hospital (all within 1.5miles of each other). Additionally, the houses are a single road into the city centre attracting a lot of young professionals. The location by itself provides legacy resilience.
Birmingham is the largest centre in Great Britain for employment in public administration, education and health, and after Leeds, the second largest centre outside London for employment in financial and other business services. Although just 8% of the city’s economy accounts for manufacturing and engineering, these companies still provide a whopping 100,000 jobs.
Birmingham also boasts large insurance market and thousands of firms of all sizes, with everything from law and creative to overseas banks and management consultancy firms on offer.
The versatility of Birmingham’s economy means that there’s a huge range of graduate jobs available there, from a myriad of different companies, which include: Deutsche Bank, EY, Rolls Royce, DHL, Vodafone, Next, Virgin Media, Barclays, IBM, HSBC, Capgemini, BT, Deloitte and many more.
The Big City Plan is a major development plan for the city centre of Birmingham. Stage 2 of the Big City Plan, the City Centre Masterplan was launched on 29 September 2010. This masterplan sets out how the city centre of Birmingham will be improved over the next 20 years. The plan identifies five key areas of development potentially worth £10 billion. The aim of this ambitious plan will be to increase the size of the city core by 25%, improving transport connectivity throughout the seven ‘quarters’ that make up the city centre. It identifies how the city centre population will grow providing more than 5000 new homes and 50,000 new jobs. It also sets out visionary proposals in which each of the seven 'quarters' will be able to evolve.
In short, our property locations and long term strategic plans for the city sit in line with our investment strategy.
Quality Product
We offer a superior product to our competitors and work at a profit an approximate profit margin of 61%. We could drop rents by 25% and still retain a 48% profit margin.
Every good Estate Agent and Letting Agent knows that well-presented properties achieve more money. Our average rental per room for the high end rooms have increased from £117.50 to now £132.50 which is a 12.7% increase over the last 3 years.
Simply put - 'As a property company focusing on quality and design will mean we can compete on quality rather than price. Naturally a lower supply means there's a higher demand for our product'
Portfolio Diversification
2020 has shown us that despite our market resilience that diversification is key to future success.
property investments are relatively heterogeneous by there very nature, however, EIG is committed in 2021 to take advantage of its land acquisitions to develop more single lets, commercial and healthcare products each of which have strong returns in themselves.
2021/2022 financial year has already seen us invest circa £0.5M into acquiring land with the view to solely diversify/risk mitigate whilst also continue to grow.
Author: Deepak Malhi - March 2021
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