The property sector has been hammered, but who will be the winners and losers in future?
Liberty International's (LSE: LII) fall of 12% over the past few days, following the release of the shopping-centre group's interim results, reminds us that property is still a dangerous game. But are we seeing a bottoming out for the sector, or is worse news to come?
My opinion is that there's considerable pain still to come in both residential and commercial property, but with some companies trading on discounts to historical net asset values of more than 50%, it's much more difficult to determine whether this pain is already factored into the market.
If you are tempted to catch one of these falling knives, I think the focus should be on debt levels and interest cover -- that is, the ability to keep the mortgage paid. Tens of billions in loans fall due during the next two years and, if cash remains tight, I'd expect the better funded companies to outperform those with higher debts or uncertain incomes.
With that in mind, I set out to find future winners and losers in British real estate.
One of the more vulnerable businesses could be MWB Group Holdings (LSE: MBW), currently 113p, which owns hotel chains Malmaison and Hotel du Vin. It also owns 68% of flexible office specialist MBW Business Exchange (LSE: MBE). In uncertain times, customers need exactly the sort of services MBE offers, but on the other hand they want those services so that they can get out in a hurry if they need to. With interest cover of only 0.62, MWB looks rather risky.
I'd also be concerned about debt levels at Mapeley (LSE: MAY), trading at 1,150p, which owns a large portfolio of offices. Interim results were published today.
Residential property owner Grainger (LSE: GRI), priced at 213p, is also highly geared. On Thursday, property fund Regis Group abandoned any plans to make an offer for the company, citing concerns about house prices and the economy. Expect a trading update on Tuesday.
Towards the other end of the spectrum, Daejan (LSE: DJAN), currently at 2,770p, is a blend of commercial and residential property, has gearing of only 14%, and its interest is covered nearly four times. Last month, it actually increased its dividend, which shows that management is not expecting debt problems in the immediate future.
Rugby Estates (LSE: RES), with a 297p share price, is another property group that has not over-indulged in borrowing. It's reportedly raising equity at the moment, not because of any funding problems, but to take advantage of asset sales by distressed owners.
Panther Securities (LSE: PNS), trading at 328p and 7.5% owner of Rugby Estates, is another example of a company that has prepared itself for a downturn, selling off properties in 2007, and putting itself in a position to pick up bargains when the time is right. The company also has a famously outspoken CEO and Chairman -- you can read some of his ramblings here.
Finally, a share that could go dramatically in either direction: Capital & Regional (LSE: CAL). I drew attention to its steaming pile of debt some months back, but new strategies are being put in place and announcements are expected at the end of August. This should be worth watching.
Obviously this is just a 'first cut' at figuring out which companies should perform better than others in the sector. More research would be needed before backing these opinions with cash; in particular, I'd want to examine the debt and interest cover situations in more detail. It should also be worth checking when the debts of these companies are due for repayment.
More: What Not To Buy: Low Interest Cover
More information on one of these companies is available from the Champion Shares website, as editor Maynard Paton tipped it as a 'buy'. You can check it out now by taking a 30-day trial free of charge.
