Directors' Valuation of the Investments Portfolio

The Directors’ valuation decreased by 6% to £1,212 million (2022: £1,291 million) due equally to a weakening of the US dollar against sterling and an increase in discount rates. The portfolio is 58% weighted towards the US (2022: 58%). The number of projects in the portfolio remained at 59 (2022: 59).

Balfour Beatty invested £31 million (2022: £30 million) in new and existing projects, with UK investment focused on the Eastwick and Sweetwater redevelopment and US investment predominantly relating to the addition of a student accommodation project in Tallahassee, Florida. The West Slope student accommodation project at the University of Sussex, which reached financial close in December 2023, has now been included as a separate project.

Movement in value 2022 to 2023

Cash yield from distributions amounted to £48 million (2022: £89 million). Balfour Beatty continued disposals in the year with proceeds of £61 million (2022: £93 million). This comprised £56 million from the sale of its stake in Gloucestershire Waste PFI, and £5 million from the sale of the Moretti Apartments multifamily housing project in Birmingham, Alabama.

Unwind of discount at £87 million (2022: £85 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 £1 million decrease (2022: £139 million increase). The operational performance movements in the UK were primarily due to a revaluation of a student accommodation project due to higher than forecast rental increases, and an increase in short term interest rates. In the US, the decrease arose in the US military housing portfolio due to increased insurance and independent compliance monitor costs, partially offset by higher annual rents.

The foreign exchange movement was a £43 million decrease, as sterling appreciated against the US dollar (2022: £85 million increase).

Methodology and assumption changes

The methodology 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. 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 valued based on periodic broker reports for each property.

The valuation methodology used at the previous Directors’ valuation is unchanged. The discount rates used for the valuation at 31 December 2023 have been increased to reflect changes in secondary market discount rates, which have progressively responded to increases in long term interest rates. As a result, the implied weighted average discount rate for the UK portfolio increased by 0.4% to 8.3% (2022: 7.9%) and the implied weighted average discount rate for the US portfolio increased by 0.2% to 8.1% (2022: 7.9%).

Discount rates applied to the UK portfolio range from 7.25% to 9.25% (2022: 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 8.3% (2022: 7.9%) and a 1% change in the discount rate would change the value of the UK portfolio by approximately £50 million.

Discount rates applied to the US portfolio range from 6.25% to 10.5% (2022: 6.0% to 10.5%). The implied weighted average discount rate for the US portfolio is 8.1% (2022: 7.9%) and a 1% change in the discount rate would change the value of the US portfolio by approximately £77 million.

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 £26 million and a 1% change in the long term rental growth rate in the US portfolio would change the valuation by approximately £75 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 UK-adopted international accounting standards 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 2023 Annual Report on pages 81 to 87.

Portfolio valuation December 2023

Value by sector

Value by phase

 Value by income type