This business is taking advantage of the downturn and buying at 9% yields.
Last year I told you about one of the most appealing shares in commercial property. London & Stamford (LSE: LSP) had cropped up on my radar for Champion Shares after joining AIM during 2007. It raised £238m and was basically a cash shell looking to take advantage of distressed sellers in the sector.
I thought a particular attraction to London was the track record of its management. The board's original venture was sold in 1989 for £278m after tripling shareholders' money during a three-year stock market stint. The managers then formed Pillar Property in 1991, which was sold in 2005 for £811m after achieving a 22% annual average return following its 1994 flotation.
So far at least, London has performed well. The price has risen from 102p to 114p since my original write-up, while the FTSE 100 index has dived from about 6,000 to around 4,400. I also see sector heavyweights British Land (LSE: BLND) and Land Securities (LSE: LAND) have fallen 45% and 65% respectively.
9% yields
Certainly London appears to be picking some cheap assets at the moment. Recent statements have announced the purchase of a retail park in Liverpool for £61m, a distribution centre in Wellingborough for £20m and an office in Leeds of £38m -- all on 9% or so gross rental yields. London has also acquired a 16% stake in the Meadowhall shopping centre on a 6.75% gross yield. Interestingly, the seasoned management claimed last week that "the high point in yields may already have been reached where income is seen as secure and sustainable."
Still, I don't think I'd buy London right now. Its last results showed net assets of £292m, but the market cap at 114p is £325m. The premium suggests investors currently anticipate further bargain deals and/or favourable property re-valuations. Personally I'd only look to invest when the share price trades at or below book value, in order to capture a greater part of London's returns.
Premium to cash
It's a similar story at Max Property (LSE: MAX), another AIM share that is looking to snap up bargain properties. It raised £200m when it joined the market last month and its management has a decent record, too. The directors' first venture earned 34% average annual returns between 1987 and 1997, while the second generated 25% average yearly returns between 1997 and 2003. Even so, I'm not tempted to pay a premium for Max's cash pile when the market cap is £240m at 120p per share. I suspect fellow 'vulture fund' NewRiver Retail Capital, which is looking to raise £250m through an imminent AIM flotation, will also trade at a premium to its war chest.
So at the moment, I'd rather hunt through the property sector myself for possible bargains. Indeed, last year I also spotlighted a commercial property business that I did recommend for Champion Shares. Back then I thought it offered some of the most durable executives in the industry plus a 14% gross rental yield. I believed it was an attractive recommendation then and I feel it remains an attractive recommendation now.
In the meantime, I think it could pay to keep watch on London & Stamford, Max Property and NewRiver Retail, if only to learn what assets and valuations the sector experts find attractive.
Maynard writes Champion Shares, the Fool's share-tipping newsletter. This free 30-day trial provides full access to the index-beating service, and reveals all of his past and present recommendations. There is no obligation to subscribe.
