Valuations are up but share prices have spluttered. Something has to give.
If you trade or invest in individual shares and you haven't scratched your head over commercial property in the past 18 months, then perhaps you've not been looking hard enough.
Battered in 2007 and 2008 by the combined forces of the credit crunch, the recession, and the returning to earth of shares that had previously been re-rated to Canary Wharf-like heights, at the point of maximum pessimism last year the sector turned on a dime, giving nimble investors a second bite of the 'risk on' rally that had already invigorated the wider stock market.
UK commercial property valuations soared as surveyors and trade buyers agreed the world wasn't ending, after all. The prices of most FTSE-listed REITS and commercial property developers swiftly followed.
What went up has now come down
Yet despite the staunching of both valuations and voids, and the subsequent office price appreciation occurring all around them, the City boys seem increasingly unconvinced by this commercial property revival.
After touching 324p in early March 2009, Land Securities (LSE: LAND) had near-doubled to 726p by November, for instance. Yet despite the ending of the UK recession, ongoing super-low interest rates, and the continuing growth in its Net Asset Value (NAV), Land Securities is now languishing at 616p, having dipped as far as 545p last month. It's yielding a tasty 4.6%, too.
And Land Securities is far from alone in seeing its recovering business rewarded with a falling share price:
- Fellow blue chip British Land (LSE: BLND) is yielding just under 6%. It yielded roughly 1% three years ago.
- Shares in commercial and residential landlord Daejan (LSE: DJAN) trade at about a 50% discount to its NAV per share -- assets that are delivering an underlying double digit gross rental yield.
- At 41p, new investors in developer Quintain Estates and Development (LSE: QED) are buying an attractive and diverse portfolio of potentially lucrative assets that are already valued at around three times as much as the share price.
- Capital & Counties Properties (LSE: CAPC) -- the newly spun-off London landlord that boasts the sexy newly opened Covent Garden Apple Store among its prime tenants -- saw its portfolio of income generating properties increase in value by 5.3% in the first-half of 2010. Adjusted NAV rose to 138p, but the shares are 21p down on its May debut, at 113p.
Gloomy talk around the office water-cooler
Nice yields backed by prime portfolios from the big landlords, big discounts to net assets from the smaller players, and after the capital raisings of last year far fewer balance sheet worries -- so why are share prices falling?
Well, one reason is that when investing it's often better to travel to arrive -- even with assets that don't go anywhere like an office block.
Last year's bounce back put the share prices of Land Securities and British Land at a premium to their more slowly rerating NAVs. As the rate of NAV appreciation has moderated, those premiums have fallen away to become more typical discounts.
Then there's the recent directorspeak from the companies, which isn't entirely bullish if you're reading while sipping a half-empty glass of water:
- Quintain: "The recovery in the property sector has yet to become widespread or gather momentum."
- Capital & Counties: "There are now signs that there is less urgency amongst investors and purchasers."
- Land Securities: "We see strong investor demand in some sub-markets, but early evidence of price resistance in others."
- British Land: "Valuations have risen more slowly in this quarter, reflecting in part a more uncertain economic outlook."
These are the sentiments that investors have focused on when perusing the latest updates. Yet while they make gloomy reading when grouped together like that, in every case the comments were made as caveats rather than central projections. Managers otherwise spoke of foreseeing a strong performance in the months ahead.
For example, in a statement on Tuesday, Quintain CEO Adrian Wyatt also said that:
"Our focus on the fulfillment of our strategy is unequivocal and we anticipate the delivery of further milestones before the end of the calendar year."
This follows the announcement on Monday that Quintain had sold its Pier Walk development in London's Greenwhich Peninsula for £97 million -- some 6% above its valuation of March.
Long-term value
Personally, I think this looks like the best opportunity to invest in commercial property shares for years.
Despite butterflies over growth and the austerity measures to come, virtually all economists from the Government to the IMF expect the UK economy to keep expanding through into 2012 and beyond.
The shares mentioned in this article have the bulk of their assets in London, too, which is likeliest to withstand savage public sector spending cuts.
Meanwhile interest rates look set to remain low for years to come -- and property is about as good as any asset to own if we see a lot of unexpected inflation sparked up as a result.
Many listed property companies are still trading at 70% or more off their value of three years ago. Short-term gains may be elusive, but commercial property is recommended as a long-term addition to well-diversified portfolio, and if you don't buy now -- at these prices, discounts and yields -- then when?
Popular articles:
> Owain owns shares in Land Securities, Daejan and Quintain.
