You are currently viewing our desktop site, do you want to visit our Mobile web app instead?
 Registered users can save articles to their personal articles list. Login here or sign up here

UK Reit discounts grow, but investors remain cautious

Once a firm favourite among value-chasers, the UK has lost its lustre.

It was a nail-biting 2016 for UK-focused real estate investment trusts (Reits), which have emerged as the worst performers of the year and biggest casualties from Britain’s pending exit from the European Union (known as Brexit).

Share prices of the London Stock Exchange (LSE) and Johannesburg Stock Exchange (JSE) UK-focused Reits are still in the doldrums, with many still down 20% to 30% since the surprise Brexit vote on June 23.

Investors hitching their wagons into the UK real estate market felt pain last year, as the FTSE EPRA/NAREIT UK Index, which makes up the LSE’s 35 biggest real estate stocks, has shed 8.5% in sterling total returns in the year to December 30. The sector is now trading at an eye-watering 17% discount to Net Asset Value (NAV). On the JSE, most UK-focused Reits are now trading at double-digit discounts to NAV.

Not only have Brexit jitters weighed on UK Reits via the JSE, but also the 25% gain in the rand relative to the pound in 2016. Of course, offshore property stocks are more sensitive to rand exchange movements than SA-focused stocks. 

The big question is whether now is a good time for SA investors to increase their exposure to the UK real estate market on the JSE without physically taking their rands offshore given the attractive valuations?

Catalyst Fund Managers’ offshore investment analyst Jamie Boyes says there is value in some stocks on a risk adjusted basis. “It does come to price at the end of the day. The attractiveness of the pricing in some stocks and the uncertainty in the future on the whole probably weigh each other out. Although many counters are trading at discounts to NAVs, those NAVs might come under pressure,” Boyes tells Moneyweb.  

He bases the looming pressure on the volatility that will remain high 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.

There are concerns that the UK might head for a hard Brexit when Article 50 (a law that outlines the procedure for the actual exit) is triggered in March 2017. A hard Brexit means that there might be major structural changes to the UK economy including giving up full access to the EU and a new tax dispensation, while a soft Brexit implies no major changes. 

Stanlib’s listed property analyst Lawrence Koikoi says the attractiveness of UK Reits hinges on the type of exit the country negotiates. He says a soft Brexit (what the markets are hoping for) could infer that a rebound in shares prices, in general, may be feasible alongside the pound strengthening.

“However, one has to be very selective in the hard Bexit scenario where it would be critical to assess the sub-asset classes, for example, retail vs office, residential vs industrial,” says Koikoi.

Resilient sectors

Boyes believes that fundamentals in the industrial sector are probably the best, specifically for well-located distribution space that can service London.   

The office and retail sectors are the most vulnerable should the UK go into a recession or a hard Brexit scenario. Over the past four years, office real estate prices and rentals have run hard in central London, which is heavily dependent on the financial services sector. The key concern for landlords and property investors is that corporates might jettison expansion plans in the UK. This scenario might result in weak demand for office space given the uncertainty surrounding the country.  

In the retail sector, a weaker pound might put pressure on retailers’ margins as some might have to import goods, raising their input costs. “As their margins are squeezed, the ability to pay rent is less,” says Boyes.

As investor and consumer confidence dips in the UK, house prices are expected to come under pressure. George Radford, the Africa head for international property investment firm IP Global, forecast that overall house price growth in the UK would be 5.3% in 2016, but some Southern boroughs of London such Croydon would clock up nominal growth (before inflation) of 8% to 10%. IP Global helps South African investors purchase apartments in the UK valued at up to £400 000 (R6.6 million at the time of writing). Radford adds that central London property prices in towns such as Kensington, Chelsea and Westminster have been cooling down after a sustained run.

Stock picks

SA investors have more than ten UK-focused real estate companies to choose from on the JSE. Counters including former market darling Capital & Counties Properties, shopping mall owners Capital & Regional Properties and Intu Properties, New Frontier Properties and Atlantic Leaf have nearly 100% of their properties located in the UK. These counters were the worst performers of 2016 (See below).

Company

Total return for 2016

Capital & Counties Properties

(51.49%)

Redefine International

(40.57%)

Capital & Regional Properties

(39.79%)

Intu Properties

(33.64%)

Atlantic Leaf Properties

(32.53%)

Stenprop Limited

(29.86%)

New Frontier Properties

(16.44%)

Hammerson

(15.95%)

Texton Property Fund

(9.93%)

MAS Real Estate

(9.92%)

   

Source: Catalyst Fund Managers.

Other counters including Redefine International, Stenprop, MAS Real Estate and Texton Property Fund have part of their property portfolio in the UK.

Although cautious of investing in the UK, the head of listed property at Absa Asset Management Fayyaz Mottiar says he finds value in shopping mall owner Capital & Regional given its yield of more than 4% and its attractive NAV. Mottiar adds that he finds value in other markets in Europe given the “uncertainty that Article 50 brings”.

Grindrod Asset Management’s chief investment officer Ian Anderson supports Mottiar’s view saying that its investment house has steered clear of UK property companies. “The uncertainty around Brexit means it’s difficult to forecast the pound exchange rate, UK GDP growth, interest rates and bond yields. Globally, yields are at multi-decade lows and there’s only one direction for them to go from here – up,” Anderson says.

Oops! We could not locate your form.

Get access to Moneyweb's financial intelligence and support quality journalism for only
R63/month or R630/year.
Sign up here, cancel at any time.

AUTHOR PROFILE

COMMENTS   4

To comment, you must be registered and logged in.

LOGIN HERE

Don't have an account?
Sign up for FREE

uk£ down yet again. so won’t be going near any uk investment. likewise for europe – “where angels fear to tread”. so all those REIT’s using YOUR money to buy fancy shOpping centres all over eastern Europe while paying themselves HUGE commissions – no thanx!

FTSE 100 listed equities are very attractive investments given the falling GBP, as a lot of these companies earn the majority of their revenues ex-UK in foreign currency, which then translates into higher earnings and higher prices as we’ve seen over recent weeks.

Robert I actually agree with you – Especially the management fees these REITS charge. But consider just how much (sentimental) negativity is priced into Brexit, if it turns out even ‘less-bad’ than expectations we could see some real rerating. Particularly for a SA investor, as our recent currency strength (combined with general long term depreciation against major countries, such as UK, due to inflation differential) gives a currency cushion.

But there’s a bigger problem for all property (listed REITS and buying personal homes): the interest rate cycle is strongly focused on going up from here – this has to put pressure on property yields ..we all know how long interest rate cycles can last, and also that the last 5 years interest rates are largely unprecedented. Tough to allocate a meaningful portion of ones portfolio to property at the moment, but some smaller allocations may be justified (worth the inherent risk)!

Load All 4 Comments
End of comments.

LATEST CURRENCIES  

USD / ZAR
GBP / ZAR
EUR / ZAR

MONEYWEB NEWSLETTERS

Subscribe to our mailing list

* indicates required
Moneyweb newsletters

Podcasts

SHOP NEWSLETTERS TRENDING CPD HUB

Follow us:

Search Articles:Advanced Search
Click a Company: