When one thinks of Lloyds (LSE: LLOY), what comes to mind is typically its banking operations. But the company has a broader financial services offering than banking alone. Currently it is planning to move into owning and renting residential property on a big scale. Here I consider what that might mean for the Lloyds share price.
Lloyds the landlord
The bank has set up a residential renting venture, known as Citra Living. It will start by buying newly built properties to rent out. The company plans to buy 400 this year and the same again in 2022. But some analysts believe that the company’s ambitions could ultimately run into tens of thousands of units rented out to tenants.
For now, detailed information is not available so it’s not yet clear what the possible financial results of such a business will be. In any case, setting up a new business often takes time and money. I don’t expect the new business to be a significant contributor to either revenues or profits at Lloyds for some years to come.
The banking business model
Lloyds already has a lot of knowledge and expertise when it comes to the residential property market. As the UK’s largest mortgage lender, it has an intricate understanding of everything from valuations to people’s ability to repay. Add to that its well-known brand name and I can certainly see a strategic logic to its move into renting out homes.
But there are two reasons I don’t like the proposed move into renting by Lloyds.
First, I don’t think the banking business model is the same as that of being a landlord. Landlords are directly exposed to the property market. So if there is a property crash, for example, the value of their assets can fall sharply. In banking, by contrast, it’s possible to make money charging interest on mortgages whatever happens to property prices. It’s not without risk, of course: in a recession, defaults can soar. But the risk profile is different to that of letting property. Unlike renting property, banking is heavily regulated and barriers to entry are high. That helps sustain profits for a handful of leading banks such as Lloyds.
Secondly, I think that the move could distract Lloyds’ management. The bank has made good progress in recent years. But the Lloyds share price is still a fraction of what it was before the financial crisis. In 2008 Lloyds became a penny share. It has remained one ever since. Meanwhile, the core banking business has become more competitive. Fintech companies now challenge banks like Lloyds in traditionally lucrative business areas such as foreign currency payments. I think Lloyds’ executives need to focus fully on their banking business.
So while a successful rental business could boost the Lloyds share price, I am concerned that in fact it could well hurt it.
The Lloyds share price
I have been optimistic about the prospects for Lloyds as a shareholder myself. But the latest move has dampened my enthusiasm.
I plan to hold my Lloyds shares for now. But I will keep a close eye on the bank’s future results. I’m concerned management could take its eye off the ball in banking. That risks damaging profits as the bank seeks to recover from the pandemic. That could hurt the Lloyds share price.
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Christopher Ruane owns shares in Lloyds Banking Group. The Motley Fool UK has recommended Lloyds Banking Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
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