Today’s first half results from property investment and development company Great Portland Estates (LSE: GPOR) are resilient, but show that its operating environment is challenging. It has seen the economic environment become increasingly uncertain since the EU referendum and feels this will result in lower economic growth. As such, it seems as though Brexit will have a negative impact on UK property, despite some indications to the contrary.
Great Portland’s portfolio valuation was down 3.7% in the first half of the year, with developments falling by 1.5%. Its six month capital return was minus-3.2%, with total property return being minus-2.2%. Great Portland’s rental value has declined by 0.5%, with its net asset value per share falling by 4% over the six month period to 813p.
Despite this, there has been progress in a tough market. Great Portland has recorded 26 new lettings since the start of the financial year, securing annual income of £12.1m. It has a further £5.9m of lettings under offer and has delivered 10 rent reviews that secured £5.2m. This is 53% ahead of passing rent, while Great Portland’s vacancy rates remain low at 3.1%. Its seven-year average lease length and diverse tenant base mean that compared to other property investment companies, Great Portland is relatively well diversified.
And the future?
However, the impact of Brexit is likely to hurt its future financial performance. Since the EU referendum, confidence in UK property has come under pressure, but it’s likely to become increasingly problematic in the coming years. There’s likely to be a step change in levels of uncertainty during 2017 when the government begins formal negotiations with the EU. This could lead to delays in investment within the UK, with London’s status as a global financial centre set to be challenged.
Of course, the result of Brexit talks could be satisfactory. The UK may maintain access to the single market and London could continue to be a major player in the global financial system. However, this isn’t guaranteed so confidence in London’s property market could decline and leave Great Portland facing an even more challenging outlook than it has experienced in the first half of the year.
Despite this, Great Portland and other property stocks such as Berkeley (LSE: BKG) offer considerable investment appeal. Although they face uncertain futures, both offer wide margins of safety. This reduces their risk profiles and means that even if Brexit causes difficulties in the UK property market, Great Portland and Berkeley could still offer strong total returns.
For example, Great Portland has a price-to-earnings growth (PEG) ratio of 1.4, while Berkeley’s PEG ratio is only 0.1. Both of these figures indicate that while their short-term performance may be disappointing, now may prove to be a good time for long-term investors to buy. After all, history tells us that the best time to buy shares is when the future looks to be at its most uncertain.
