WOOD Flash – ONE United Properties: 3Q22 – resi gross profit trails our estimate

ONE continues to expand its standing assets portfolio, with a combination of in-house developments and acquisitions. This should translate into materially higher net rental income in 2023E. The apartment sales slowed down in 9M22 compared to last year, driven by a shortage of apartments available for sale. Recently, ONE received the permits for developments spanning some 1.8k units and expects to get a permit for ONE Lake District (another 2.0k apartments) by the year-end. This is a significant amount of new construction starts and sales launches, coming into what could be a softer demand backdrop. The reception of these projects by customers, the pace of sales over the next 12-24M and the margins reached will be a crucial driver for the stock in the near- to mid-term. ONE’s upmarket projects have, historically, attracted a high share of cash buyers, an important silver lining when rates are on the up. The tight permitting situation and a shortage of residential developments in the central areas in Bucharest also help. That said, we see a risk that the transition into higher rates is likely to weigh on new mortgage origination in Romania. A slowdown on the secondary market could make it more difficult to finance the purchase of a new apartment by selling an old home; thus, in turn, affecting the demand for new apartments. Following the capital increase, ONE has substantial liquidity, which could help it to act on opportunities that may emerge as the real estate markets shift to a new price equilibrium. Still, if the apartment sales dynamics slow down, and the gross profit margin in the residential segment softens from the current stellar levels of around 40%, the business could become more capital intensive.