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Will Lloyds’ bold foray into home rental bear fruit?

UK banking giant Lloyds has set an ambitious target of owning 50,000 homes in the next decade.

  • Lloyds (LON: LLOY) share price slips to 44.09p per share on Friday (30 Aug)
  • The lender is entering the home rental market, hoping to become a giant UK landlord
  • Analysts are mostly bullish on the stock, on average targeting 8.4% upside
  • Keen to trade Lloyds shares? Open an account with us to start trading the stock.

Lloyds stock price stumbles

Shares of British financial conglomerate Lloyds fell 0.3% to close at 44.09 pence on Friday in London.

The UK’s largest mortgage lender is venturing into the home rental market, and internal documents recently revealed the scale of its goal.

As of Sunday, research teams were largely optimistic on the LLOY stock, with 16 recommending ‘buy’, seven suggesting ‘hold’, and three with ‘sell’ calls.

Their average 12-month target price stood at 52.49p, Bloomberg data showed. That implies a potential upside of 8.4% based on Friday’s close.

Lloyds’ move into property: What might it entail?

Lloyds is diversifying into residential property investment through the UK’s build-to-rent sector. It hopes to become one of the country’s biggest private landlords.

The bank is aiming to buy 10,000 homes by the end of 2025, before reaching 50,000 properties by 2030, based on an internal job advertisement, The Financial Times (FT) reported.

The lender estimated that with 10,000 homes, its Citra Living brand will have a balance sheet worth about £4 billion and generate some £300 million in pre-tax profit.

Heather Powell, partner at tax firm Blick Rothenberg, questioned whether the new homes Lloyds plans to buy will meet the needs of the majority of people ‘who are searching for affordable, not new, homes’.

FT columnist Helen Thomas opined that the property play was another sign of banks hunting for new revenue streams amid rock-bottom interest rates.

Thomas also described the retail bank’s aspirations as ‘surprisingly big’, partly because Lloyds may face reputational pitfalls in tenant management, and is also getting into housing equity ‘at a point when plenty of others looking for long-term, inflation-linked returns are doing the same’.

‘A strategic shift in search of returns into an at-best adjacent market seems the real risk here,’ she added.

Should you take a chance on Lloyds?

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How do analysts view the stock?

Barclays, maintaining an ‘overweight’ call and 62p price target, sees ‘significant value’ in LLOY shares.

‘We see Lloyds as best placed to deliver double-digit RoTE (return on tangible equity), consensus-beating earnings, whilst also benefitting from likely write-backs,’ Barclays analysts noted.

Its new CEO Charlie Nunn ‘will need to confirm the approach to surplus capital returns, likely alongside a new medium-term strategy, with FY21 results’, Barclays added.

Meanwhile, Bloomberg Intelligence (BI) wrote that the uptick in UK mortgage demand has been ‘a powerful tailwind’ for UK banks.

However, despite the mortgage market’s attractiveness, Lloyds has said that more competitive pricing and several other sectors would ensure it remained disciplined in its underwriting.

‘While the strength in pipeline for 3Q mortgage volumes was also highlighted, Lloyds’ view that a slowdown is due in 4Q… tallies with our thinking and should slow the housing market,’ BI added.

This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients.

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