Directors' Valuation of the Investments Portfolio

The Directors’ valuation increased by 17% to £1,291 million (2021: £1,106 million). The portfolio is 58% weighted towards the US (2021: 57%). The number of projects in the portfolio decreased to 59 (2021: 64).

The half-yearly review of the Directors’ valuation methodology and assumptions has resulted in changes to the methodology and the discount rates for the UK and US. The table below shows the movement in the Directors’ valuation on a like-for-like basis with the prior year, and then shows the effect of the methodology and assumption changes. Following the year end, a third-party valuation expert independently reviewed the portfolio and the Directors’ valuation is consistent with their conclusions.

Movement in value 2021 to 2022

Balfour Beatty invested £30 million (2021: £19 million) in new and existing projects. During the year, the Group added one new project, a US multifamily housing project in San Antonio, Texas.

Cash yield from distributions amounted to £89 million (2021: £62 million) as the portfolio continued to generate cash flow to the Group, net of investment. This included £22m of yield from refinancing a student accommodation project in the US.

Balfour Beatty continued disposals in the year with proceeds of £93 million (2021: £81m). This included: £50 million from the sale of its stake in Purdue student accommodation and £43m from the disposal of its stake in four US multifamily housing assets. Additionally, a residential accommodation project in the UK received its final cashflow and is therefore no longer in the portfolio.

Unwind of discount at £85 million (2021: £83 million) is a function of moving the valuation date forward by one year with the result that future cash flows are discounted by twelve months less.

Operational performance movements resulted in a £139 million increase (2021: £27 million). The operational performance movements in the UK were primarily due to high actual and 12-month forecast inflation. In the US, operational performance movements were mainly the impact of higher military housing rents agreed for 2023 and £47m of gain on the disposals noted above.

Foreign exchange movement contributed an £85m increase to the valuation of the US portfolio due to sterling weakening against the US dollar.

Methodology and assumption changes

The methodology used for the Directors’ valuation for valuing most investments in the portfolio remains the discounted cash flow (DCF) method. Under this methodology cash flows for each project are forecast based on historical and present performance, future risks and macroeconomic forecasts. They also factor in secondary market assumptions. These cash flows are then discounted using different discount rates, which are based on the risk and maturity of individual projects and reflect secondary market transaction experience and the Group’s current assessment of the impact of recent rises in long-term interest rates. The main exception to the use of DCF is for US multifamily housing projects which, due to the perpetual nature of the assets and the depth and liquidity of the rental housing market, are now valued based on periodic broker reports for each property. Both forms of valuation methodology reflect market values and therefore change with movements in the market.

The only change made to the UK portfolio was a reduction of 0.25% in the base reference discount rate applied to each project. This change has increased the valuation by £14 million. The approach to the project specific risk premia that are added to the reference discount rate remains unchanged. The resulting UK discount rates range from 6.75% to 8.75% depending on the maturity and risk of each project. The implied weighted average discount rate for the UK portfolio is 7.9% (2021: 8.1%). A 1% change in the discount rate would change the value of the UK portfolio by approximately £59 million.

The changes to the US portfolio comprise discount rates and methodology changes for the military housing portfolio. Discount rate changes increased the valuation by £40 million. Following these changes, discount rates applied to the US portfolio now range between 6.0% and 10.5% and the implied US weighted average discount rate is 7.9% (2021: 8.3%). A 1% change in the discount rate would change the value of the US portfolio by approximately £86 million.

For the military housing portfolio, specific changes have been made to rental growth rates, overheads and tax. Rental growth rates on each project are now based on the average growth rate over the last ten years. The overheads and tax changes are based on an assessment of the minimum amount that a purchaser of the portfolio would factor in when arriving at an acquisition valuation. The rental growth, overhead and tax changes reduced the valuation by £26 million.

As demonstrated through the operational performance gain in the year, the portfolio remains positively correlated to inflation. A 1% change in the long-term inflation rate in the UK portfolio would change the valuation by approximately £28 million and a 1% change in the long-term rental growth rate in the US portfolio would change the valuation by approximately £80 million.

As in previous periods, the Directors’ valuation may differ significantly from the accounting book value of investments shown in the financial statements, which are produced in accordance with International Financial Reporting Standards (IFRS) rather than using a discounted cash flow approach. A full reconciliation is provided in section i) of the Measuring Our Financial Performance section in the 2022 Annual Report.

Portfolio valuation December 2022

Value by sector

Value by phase

Value by income type