Capital & Counties (Capco) has emerged as a casualty from the UK’s glum economic prospects following the Brexit vote – with jittery investors aggressively selling down the company’s stock.
The stock, which has been a long-time favourite for South African investors with an appetite for offshore markets and hard currency earnings, has been down by 38% in the past month on the JSE at the time of writing.
That has wiped off R19.5 billion of its market capitalisation and the blow could further worsen as the UK maps out the actual exit from the European Union.
Industry players are already forecasting that the UK’s imminent exit from the 28-member bloc might thwart its economy into a recession.
Even in the UK, where Capco has a primary listing on the London Stock Exchange (LSE), investors sent the stock down by 22% in a month. Trading off a 22% discount to net asset value (NAV) – broadly in line with the whole UK’s listed property sector which is now trading at a 26% discount to NAV – some punters view Capco as a bargain buy.
Ian Anderson, chief investment officer at Grindrod Asset Management says its firm has been concerned about the valuations of UK-focused property stocks. “While we’ve acknowledged that the large discounts to NAV could possibly offer a great entry point, we have always been concerned about a ‘bubble’ especially in the London office and residential markets and more recently in the retail market,” Anderson tells Moneyweb. Questions have emerged about London’s property market being in “bubble territory”, given the rapid growth of rentals and property values.
There’s a school of thought in investment circles that it’s often better to be a buyer when others are more than willing to sell. And Foord Asset Management has subscribed to this thought, as the firm has been steadily increasing its stake in Capco from 3.32% in May to the current 7.10%; and the central bank of Norway, Norges Bank increased its stake to 8.09%.
On the other hand, investment management company BlackRock and Investec Asset Management have reduced their shareholding, with the former scaling back from 12.96% to 11.98% and the latter now holding 4.96%.
The decline of Capco’s stock on the LSE has prompted more bearish sentiments, with investment houses Credit Suisse and BNP Paribas rating it as an “underperform” and pricing in further volatility in the share price.
The big question is whether there is still a strong investment case into Capco, which was one of the JSE’s best performing rand hedge stocks in 2015, with a total return of 55.67%. Investec Asset Management’s sector head for listed property Peter Clark says the long-term investment case remains intact for Capco, however, “there are near-term headwinds”.
Clark bases his view on the company’s flagship property asset Covent Garden, a shopping and mixed-use precinct in central London. Since taking sole control of Covent Garden in 2010, Capco has repositioned it to introduce high-end retailers such as Ben Sherman, Chanel, Ted Baker, Burberry Brit as well as casual and fine-dining restaurants.
Covent Garden is valued at £2.0 billion and makes up about 54% of Capco’s total property portfolio value of £3.7 billion (as of December 31 2015). Covent Garden’s Estimated Rental Value (ERV) has increased by nearly 130% since 2009 and the company’s management expect the current ERV of £86 million to increase to £100 million by December 2017.
Says Clark: “The Covent Garden portfolio should remain reasonably robust given its prime location and rentals which are at reasonable levels compared to neighbouring areas.”
Stanlib’s head of listed property funds Keillen Ndlovu supports Clark’s views, adding that London has been experiencing record-low vacancies. Ndlovu says most of the UK-focused property developers that Stanlib has backed such Hammerson, British Land, Land Securities, as well as Capo have been reducing their debt levels, extending their debt maturity profiles and development pipelines.
There is a concern in the market about Capco’s Earls Court project, a major residential development in west London covering 77 acres of land. The master plan is to develop four residential villages with about 7 500 homes which include mansions, loft-style apartments and affordable housing.
Given a slowing London residential property market, analysts are already questioning the take-up of residential units at Earls Court and Capco’s ability to unlock a development profit from the scheme, which has a 10- to 20-year build-out period. Clark rates Capco as a growth play. “It has a very low yield, and so it won’t get income support like other Real Estate Investment Trusts in a low yield risk off environment,” he explains.
Arguably, the biggest concern for property companies hitching their wagons to offshore markets is the impact a Brexit might have on other European regions. There is already a wide call for a referendum in other EU member states which might lead to a large scale break-up of the bloc.