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Optimism and caution over UK property stocks

UK-focused property stocks are trading at a more than 20% discount to their historic NAV on the JSE, which market watchers believe offers a cheap and attractive entry point.

It has been more than a year since Britons voted to leave the European Union (known as Brexit), which unleashed a massive selloff on the JSE and placed UK-focused real estate investment trusts (Reits) on the sore loser’s pile.

The share prices of some JSE-listed UK Reits have recovered by 5% to 15% so far this year and their total returns are now in the green, partly helped by the 17.29% gain in the rand relative to the pound since the Brexit vote on June 23, 2016. Of course, offshore property stocks are more sensitive to rand exchange movements than SA-focused stocks.

Most UK Reits on the JSE are trading at discounts to their historic net asset value (NAV) of between 3% and 45% compared with SA-focused Reits that are still fetching premiums.  

The big question is whether now is a good time for SA investors to increase their exposure to the UK real estate market via the JSE given the attractive valuations. Investors have nine property companies to choose from on the JSE that are solely focused on the UK or have a large part of their investments in the region. These include Capital & Counties Properties, Hammerson, Atlantic Leaf Properties, New Frontier, Capital & Regional, Intu Properties, Tradehold, Stenprop and Redefine International.

UK property stocks for the year to end September

Company

Share price movements

Total returns

Capital and Regional

10.56%

17.25%

Atlantic Leaf

14.85%

13.30%

Stenprop

10.03%

10.23%

New Frontier Properties

5.56%

9.39%

Redefine International

3.04%

5.73%

Hammerson

0.06%

5.57%

Capital & Counties

-4.69%

-3.90%

Intu Properties

-15.11%

-8.37%

Tradehold

-19.42%

-14.99%

     
     

Source: Catalyst Fund Managers and Moneyweb

Tom Walker, co-head of global property securities and fund manager at London-headquartered Schroder Investment Management, said the UK’s outlook is still uncertain given how Brexit will play out. Walker said share prices might continue to be volatile leading up to the UK’s actual exit from the EU and what happens to the country’s economy in the next three to five years.

The UK might head for a hard Brexit, which means that there might be major structural changes to the economy including giving up full access to the EU, while a soft Brexit implies no major changes. 

Walker said investors must look beyond the discounts to NAV when judging the investment case of Reits.  “The NAVs used are historic and have been printed many months ago. The world has changed and Brexit is changing things. Where the NAV is today is anyone’s guess.”

Stanlib’s house view is that property stocks offer good value at current levels. “We believe that the stocks have priced in most of the Brexit uncertainty,” said Keillen Ndlovu, head of listed property funds at Stanlib.

Despite initial fears that corporates would move their operations out of London to other EU regions after Brexit, which would lead to high vacancies and limited rental growth for property companies, Ndlovu said this has not been the case. “Most UK property companies are experiencing record leasing activity and there’s still a lot of cash chasing London assets,” he said.

Investors hitching their wagons onto the UK real estate market must be sector specific, said Tiffany Jones, investment analyst at Catalyst Fund Managers. Jones believes that fundamentals in the industrial sector are probably the best,

specifically for well-located logistics and distribution properties that can service London in the wake of growing e-commerce.

Craig Smith, head of research at Anchor Stockbrokers, agreed with Jones. “The one sector that is holding up fairly well is the industrial sector, which is benefitting from e-commerce and the demand this generates for quality logistics space. This is supported by the fact that the discounts for industrial-focused Reits are much tighter than discounts for office and retail-focused Reits,” he said.

JSE-listed counters that stand to benefit from the positive outlook for the UK’s industrial sector include Stenprop, which recently bought warehouse and distribution centre properties for £130.5 million, and SA-focused Equites Property Fund and self-storage-focused Stor-Age, which own industrial properties in the UK.

The office and retail sectors are the most vulnerable to a hard Brexit scenario.

There are concerns about London city being oversupplied with office space, which together with muted demand from the financial services sector might impact office rental growth. In the retail sector, a weaker pound might put pressure on retailers’ margins as the majority already import goods, which will raise their input costs. “Rising costs of goods coupled with a consumer that is under pressure may result in retailers’ margins being squeezed and their ability to pay rent to landlords being diminished,” said Jones.

On the JSE, Stanlib’s Ndlovu finds value in Hammerson, which owns retail properties (shopping malls and retail parks) in the UK and across Europe. It sold some of its UK retail properties to shield itself from the long-term effects of Brexit. Jones said Catalyst has been underweight on UK retail-focused counters given the worrying outlook for the sector.

“Fundamentals in London property versus the rest of the UK should be stronger over time. We think London is a city that would be difficult to replicate over the medium term anywhere else in Europe,” said Jones.

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My advice, especially if you are in residential to let property – get the hell out of there before Brexit.

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