The UK commercial property market has split in two over the last few years. Investors have been hungry for so-called big box distribution centres, which are busier than ever thanks to the growth of internet shopping.
At the same time, we’ve seen a number of big-name retailers get into difficulty or close. This inevitably means that some landlords will face pressure to cut rents and agree shorter leases.
The two companies I’m looking at today sit on opposite sides of this divide. Both offer a mix of opportunity and risk, as I’ll explain.
Rising rents suggest sunny outlook
Shopping centre group Intu Properties (LSE: INTU) reported a solid first quarter today. The group’s focus is on prime shopping centres such as Trafford Centre in Manchester and Lakeside in Essex. Performance in these locations has remained strong so far.
Occupancy remained unchanged during the quarter, at 96.1%. The company agreed 43 new long-term leases in the UK and 17 in Spain during the period, for an average rent 5% above the previous figure. UK footfall is said to be up by 1.5% this year, excluding the snowy weather.
I can’t ignore this big discount
Large shopping centres aren’t sold very often, so it can be hard to estimate realistic market values. However, the firm sold a 50% stake in Intu Chapelfield for £148m during the first quarter, which it says was “in line with the December 2016 market value”.
That’s encouraging, considering that Intu shares currently trade at a 49% discount to their 2017 net asset value per share of 411p.
I’m tempted by this discount. But offsetting this is the group’s loan-to-value ratio of 45%, which is a little higher than I’d like to see. It’s also worth noting that the forecast yield of 6.8% seems likely to fall later this year, if a planned all-share takeover by retail rival Hammerson goes ahead.
Are the shares a buy? If the Hammerson deal can drive down debt by refinancing and selling some properties, then I believe Intu could be a profitable investment over the long term.
Backing a proven winner
Contrarian investors may be attracted to retail property. But I think there’s a real risk it’s still too soon to buy. In contrast, the risk with warehouse property is that it might be too late.
Tritax Big Box REIT (LSE: BBOX) is one of my favoured stocks in this sector. Its shares have been fairly flat over the last year, but the group’s rising dividend has provided an attractive income stream. The forecast yield for 2018 is 4.6%.
The risk is that at a price of 146p, Tritax shares already trade at a slight premium to their net asset value of 142.2p per share. Although I think the current price is justified based on the group’s recent performance, this premium means that further gains could depend on a rising property market or on debt-fuelled acquisitions.
Focus on quality
Tritax trades at a premium because investors are confident in the value of its property and the rents they generate. The group’s weighted average unexpired lease term is 13.9 years, providing good visibility of earnings.
There’s also a shortage of such properties on the market, so empty units aren’t difficult to rent.
Stable earnings and good forward visibility are a smart combination for dividend investors. I continue to rate this stock as a buy.
