According to City analysts, real estate stocks, which have traditionally been considered a safe haven, are now in bubble territory.
Real estate investment trusts, such as British Land (LSE: BLND), Intu (LSE: INTU) Hammerson (LSE: HMSO) and Land Securities (LSE: LAND) have put in an impressive performance during the past five years.
A combination of investors’ search for yield, rising UK property prices and easy credit have all worked in favour of REITs. Over the past five years, British Land, Land Securities, and Hammerson have outperformed the wider FTSE 100 by 66%, 57% and 91% respectively, excluding dividends.
Intu is the laggard of the group. The company has underperformed the FTSE 100 by 19% since August 2010.
Nevertheless, one group of City analysts now believes that it’s time for investors to book gains in the REIT sector. Specifically, analysts believe that commercial and residential property prices are in bubble territory again, after years of growth fuelled by “loose money, low inflation and lots of cheap credit”.
What’s more, there are signs that property investors are starting to cash out of the market, booking gains made since the end of the financial crisis. Rising interest rates are only likely to lead to an acceleration of this trend.
Moreover, REITs are no longer an attractive way to play the property market. For example, Land Securities, British Land and Hammerson all trade at net asset values and offer a dividend yield that’s currently below the market average.
Crunching numbers
British Land is one of the UK’s largest REITs, and it’s also one of the cheapest. At the end of 2014, the company’s net asset value came in at 829p per share, so at present levels the company is trading at a slight discount to NAV.
Still, if the commercial property market is about to take a tumble, British Land’s NAV will fall in line with the wider market. The company’s dividend yield stands at 3.5%, slightly below the FTSE 100 average of 3.6%.
Land Securities’ dividend yield stands at a lowly 2.6%, and the company’s adjusted NAV was reported as being 1,293p at the end of 2014. Investors have been prepared to pay a premium for Land Securities’ shares due to the company’s exposure to the London property market. But with quantitative easing coming to an end, Land Securities is facing the prospect of rising costs of capital and moderating asset returns.
Hammerson reported a NAV of 638p at the end of 2014, so once again the company is trading at a slight discount to NAV. Nonetheless, Hammerson’s dividend yield of 3.3% leaves a lot to be desired, and there are better opportunities out there.
Intu has underperformed the FTSE 100 over the past five years for good reason. The company has a high level of debt and has failed to create any value for shareholders during the past six years. Since 2009, Intu’s book value per share has not exceeded 360p, while shareholder equity has increased 140%.
It seems as if the company is diluting existing shareholders to achieve growth. Also, Intu’s gross gearing around 99% and the company’s interest payments are only covered one-and-a-half times by operating income.
