Since the EU referendum, fears surrounding the outlook for the UK property market have heightened. However, today’s trading update from commercial property company Intu (LSE: INTU) shows that the sector continues to offer upbeat performance.
Intu’s quarter to 25 October included strong retailer demand, with 67 new long-term leases agreed for £13m of new annual rent. This is 4% above the previous passing rate and is in-line with the valuers’ assumptions. Furthermore, Intu’s occupancy rate is 95.6% despite the negative effects of the closure of BHS. This caused a reduction of 1% in Intu’s lettings, which has been offset to some extent by new lettings.
In terms of the outlook for consumer confidence, Intu has reported positive numbers in this regard. Footfall is up by 1.2% in the UK, which is outperforming the Experian benchmark. That’s down by 1.8% and while there could be challenges ahead as unemployment rises and GDP growth slows, low interest rates could help to alleviate pressure on consumers.
Intu remains on track to deliver growth in like-for-like (LFL) net rental income for 2016 in the range of 3% to 4%. It expects this momentum to continue in 2017 and as such, its development programme remains on track. And with Intu’s disposal of its Bromley asset for £177.9m being a premium to the 30 June valuation of £175.9m, it appears as though commercial property prices have remained robust in recent months.
Trouble ahead?
Looking ahead, Intu is expected to record a rise in earnings of 2% in the current year, followed by growth of 3% next year. While this may not be as impressive as the growth rate of the wider market, it’s ahead of the 6% fall in earnings that’s forecast for housebuilder Persimmon (LSE: PSN) in the next financial year.
Clearly, Persimmon is focused on residential rather than commercial property. However, both companies could endure a more challenging period depending on how Brexit negotiations progress. Therefore, obtaining a wide margin of safety is a sensible step for investors to take. This not only reduces the downside risk, but it also means that capital gain prospects are higher.
Both Intu and Persimmon offer wide margins of safety. For example, Intu trades on a price-to-book (P/B) ratio of only 0.75. This indicates that there’s significant upward rerating potential on the cards. Similarly, Persimmon may have a P/B ratio of 2.1, but its price-to-earnings (P/E) ratio of 9.5 indicates that it offers excellent value for money.
Although today’s results show that Intu and UK commercial property is performing relatively well despite the risk of Brexit, its future remains unclear. Uncertainty could increase significantly once negotiations to leave the EU start next year. This is likely to cause a degree of volatility in property values and in Intu and Persimmon’s share prices. However, with wide margins of safety, both stocks have long-term appeal at the present time.
