Last month, FTSE 100 bank Lloyds (LSE: LLOY) revealed that it was entering the private rental market. It’s already the largest UK mortgage lender but that’s not enough, it seems. It wants to become a landlord.
I was a little surprised when I came across the press release. But having now mulled the information, it makes sense to me. I’ve been bullish on Lloyds and would still buy the stock. Here’s why.
The announcement
Lloyds has launched what it calls Citra Living in order to become a private landlord. According to the bank, one in five UK households rent privately and it expects demand to increase over the next five years.
It believes that many traditional private landlords will leave the market due to regulatory and tax changes. This could increase the supply of rental properties. And Lloyds wants a piece of the action. Citra Living will operate as a standalone brand of the bank, purely focusing on the rental market.
The details
Lloyds has said that its new venture will “initially start small, with a focus on buying and renting good quality newly built properties”. How is it going to achieve this? Well, the FTSE 100 company is going to partner with housebuilders to “identify sites and support the building of additional housing”.
Citra Living will buy the rental element of the new developments. So Lloyds won’t take on the construction risk but it will have the ongoing income from rent. To me, this sounds like a good deal for the bank and another opportunity to diversify its revenue stream.
Lloyds isn’t hanging about as it expects to complete its first development, Fletton Quays in Peterborough, soon. Around 45 apartments will be available for tenants, which means rental income should begin in the following months.
Ambitious plans
The goals for Citra Living are big. It aims to buy around 400 properties by the end of 2021. And it wants to double this in 2022.
It has already announced a strategic partnership with Barratt Developments. And I reckon more will happen over time. Earlier this month, Citra Living boosted its management team with three new senior hires. To me, this indicates that the bank is going all in with its goal to become a private landlord.
Should I buy?
A large portion of Lloyds’ revenue is dependent on interest rates, which are at rock bottom low levels. This is likely to place pressure on the bank going forward. As I said, it’s the UK’s largest mortgage lender, which means that it’s heavily exposed to the recovery in the economy as well. This could impact the shares, especially if the UK doesn’t grow as expected.
But the good thing is that the board is diversifying its income streams. As a private landlord it should improve its cash flow. The bank is also branching out into wealth management services, which are less dependent on interest rates.
Of course this will take time, but it’s on the right track. Hence I’d buy the FTSE 100 stock right now.
