The outlook for the UK property sector is highly uncertain. Today’s half-year results from FTSE 250 investment company CLS (LSE: CLI) provide an indication of how the future will develop, and whether it’s a better buy than property-focused companies Tritax Big Box (LSE: BBOX) and Purplebricks (LSE: PURP).
CLS’s first half was positive. Net assets per share increased by 7.8% and earnings per share rose by 92% to 80.5p. This allowed it to increase distributions to shareholders by 10%, with a proposed £7.2m tender buyback of one in 95 shares.
The vacancy rate at CLS’s properties remains low at 3.7%. Its interest cover continues to be high at 3.6 times, while it has been able to reduce the weighted average cost of debt by 0.13% to 3.27%. This will provide it with greater headroom when making debt repayments and provides additional financial security.
One of the reasons for CLS’s strong performance in recent months has been its exposure to non-UK markets. In fact, 37% of its business is conducted in Germany and France, which provides it with significant diversification and reduced risk. Furthermore, CLS derives 52% of its UK income from central government and it believes that this will help to protect it against the effects of Brexit.
Brexit risk
On this topic, Brexit poses a major risk to all property companies that rely on the UK for a significant proportion of their income. The outlook for the UK property industry is the most uncertain since the credit crunch and this could cause investor sentiment towards CLS as well as other property stocks such as real estate investment trust (REIT) Tritax Big Box and estate agent Purplebricks to fall.
The Bank of England expects unemployment to rise by 250,000, the UK GDP growth rate to fall to 0.8% in 2017 and has stated that house prices will fall. This would suppress activity in the housing market, since sellers wouldn’t’t wish to sell at a lower price and buyers would wait for a lower price. As such, the volume of transactions is likely to fall and cause Purplebricks’ sales to come under pressure. The effects of this lack of activity would be exacerbated in Purplebricks’ case since it’s a low cost/high volume operator and so requires a significant amount of demand to turn a profit. As a result, its shares lack appeal right now.
Clearly, Tritax Big Box is somewhat shielded from the effects of Brexit because of its focus on large logistics facilities. They tend to be relatively stable and robust assets to hold during a period of difficulty. However, this stability appears to be adequately priced-in to Tritax Big Box’s valuation. It trades on a price-to-earnings (P/E) ratio of 17.1, which is higher than CLS’s P/E ratio of 15.6. This indicates that there’s greater upside potential from a rerating for CLS than for Tritax Big Box.
Certainly, Tritax Big Box has a higher yield than CLS at 4.4% versus 3.4%, but it’s not as well covered. Tritax Big Box’s profit covers shareholder payouts 1.3 times, while for CLS this figure is higher at 1.9. This indicates that CLS’s dividend could rise at a much faster pace than Tritax Big Box’s and alongside its non-UK exposure and lower valuation, this makes CLS the pick of the three companies.
