With the UK economy set for world-beating growth this year, it’s worth taking another look at the commercial property sector. A strong economy pushes up demand and hence rents and property values.
Property companies have benefited from easy money, so the start of tapering by the Fed is a potential risk to the sector. However, the authorities remain keen to keep interest rates down.
Here are three great plays on the sector, each of a different nature.
Mid-cap Great Portland Estates (LSE: GPOR) is a specialist in office and retail properties in London, focused on the West End. It’s a play on London’s great pulling-power for foreign investment. The main risk is if Central London commercial property proves to be a bubble.
GPE’s shares have nearly doubled in the past 12 months. They are bumping up against a high of 600p or so, last reached in April 2007. Brokers Nomura increased their target price to 650p over Christmas. If they do break out of the historic range, they could be set for further stellar growth.
British Land (LSE: BLND) (NASDAQOTH: BTLCY.US) is the UK’s second-largest REIT with a market cap of £6bn.
Its main activity is in retail and London offices. It owns one million sq ft of retail space spread across 185 outlets, including shopping centres, superstores and retail parks. Income is ultimately driven by consumer spending, which should rise with the resurgent economy. London offices are split equally between the City and West End, making a subtly different set of drivers from GPE.
British Land’s size and diversity of income make it one of the safest plays on the sector, with a healthy 4.3% yield.
At the opposite end of the scale, NewRiver Retail (LSE: NRR) is an AIM-listed REIT with a £200m market cap. It specialises in acquiring retail properties in secondary locations, and increasing valuations through asset management. Last November it acquired 200 pubs from Marstons, with the aim of transforming them into convenience stores and restaurants.
NewRiver’s shares have increased nearly 50% over the past 12 months. It’s run by cautious management who undertook similar activity before the financial crash, astutely selling out at the top of the market. The team reformed in 2009 to exploit depressed valuations.
Returns from property companies come from appreciation in asset values, and dividends including the distribution of 90% of corporation-tax exempt rental income as required under the REIT regime. The sector illustrates the massive wealth-generating power of compounding by reinvesting distributions.
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> Tony owns shares in Great Portland Estates and NewRiver Retail, but no other stocks mentioned in this article.