The outlook for the UK property market was hurt by the EU referendum result. A number of property-related stocks reported a difficult period in the aftermath of the result, with investor confidence coming under pressure. However, the sector has picked up its performance in the months following the Brexit vote and two sets of results released today show that the industry remains a sound long-term buy.
A resilient performance
Regeneration specialist St. Modwen (LSE: SMP) has delivered a robust performance in the past few months despite broader market uncertainties. It expects performance in the second half of the year to be broadly in line with that reported for the first half. And it has experienced resilient regional occupier demand across the UK for both new and existing commercial space.
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This means that St. Modwen feels confident enough to make further investments, including £45m in new acquisitions. In addition, it has made pleasing progress with its commercial development programme. Over 750,000 sq ft of commercial space has been completed and sold or leased, with further development due within what is a well-stocked pipeline.
In addition, the company’s housebuilding arm has seen demand remain relatively high during the second half of the year. It has started work on three new sites since July and expects profit from the division to be higher in the second half of the year than in the first.
Strong rental growth
Today also saw an upbeat update from UK and European property investment company Hansteen (LSE: HSTN). It reported rental growth in the UK and Germany, with increased investor appetite for multi-let light industrial property from both national and international investors. This bodes well for the company’s medium-term outlook, since it shows that confidence in the sector remains relatively high.
The company’s vacancy rate was reduced to 4.2m sq ft, which is a fall of 10.2% versus the same time of last year. During the five months to 30 November, Hansteen delivered 836 lettings and lease renewals for more than 4.3m sq ft, with further deals in the pipeline.
While the two companies have performed relatively well and are upbeat on their futures, their margins of safety are relatively narrow. For example, St. Modwen trades on a price-to-earnings (P/E) ratio of 15.1 and is expected to report a fall in earnings of 14% in the next financial year. Although Hansteen’s bottom line is forecast to rise by 6% next year, its P/E ratio of 15 also indicates that there’s somewhat limited upside in the near term.
Despite this, the UK property market has performed better than most investors anticipated following the EU referendum. Its future remains uncertain and investors should expect a volatile outlook in the near term. However, in the long run, the two companies offer the potential for high investment returns due to their sound business models and pragmatic strategies.