House prices are falling and rents are rising in the UK. These 2 stocks will benefit, analysts say

Published Tue, Sep 19 20238:23 PM EDT

Falling house prices and rising rents are expected to benefit two U.K. stocks focused on the private rented sector: The PRS REIT PLC and Grainger PLC , according to stock analysts. As fewer people can afford to buy homes, thanks to rising interest rates, demand for rental properties has risen alongside an increase in rent. At the same time, the supply of rental homes has not kept pace with demand, leading to annual rents rising by 5.3% in the 12 months to July, according to the U.K.'s Office for National Statistics. A rise in mortgage rates has also lowered demand for new houses at their current prices, heaping pressure on housebuilders to improve sales. Those contrary trends of declining house prices and surging rents have created a favorable environment for companies owning rental housing — like PRS REIT and Grainger. PRS REIT owns and operates over 5,000 family rental homes across the U.K. Grainger is the country's largest listed residential landlord with over £3 billion ($3.7 billion) in assets and nearly 10,000 properties. PRSR-GB GRI-GB 1Y line Analysts highlight rental solid growth for both companies. Jefferies has forecast 9% rental growth for PRS REIT in 2023, while Berenberg expects continued "strong organic rental growth to result in continued earnings growth, despite increasing finance costs." Jefferies expects shares of PRS REIT to rise by 63% over the next 12 months to £1.14 per share, and Berenberg cut its price target to £0.95 from £1.10. London-listed stocks are typically traded as pence per share. The investment banks also pointed to high occupancy rates for the two landlords: 97-98% for PRS REIT and 98.7% for Grainger. That indicates strong demand for their rental properties. For Grainger, investment bank Numis noted that rental growth accelerated to 6.1% in the first quarter of 2023. "Grainger sales performance is resilient with vacant sales volumes up [year on year] with pricing [average] 1.8% below Sept vacant possession values [year to date]," said Jefferies analyst Mike Prew. Numis added that Grainger's portfolio is "less reliant on mortgage lending than the wider market," making it resilient if house prices fall further. The investment bank expects shares of the company to rise to £3.54 over the next 12 months, which is 48% higher than the current share price. PRS REIT shares have dropped 21% in the past year, far above the 2.1% decline for the FTSE 250 index. Grainger's stock is down 5.4%, versus a 2.7% gain for the FTSE 100 benchmark.