Guess what? The most expensive companies in the UK operate in the real-estate sector. These are the magic five: Hammerson (LSE: HMSO), British Land (LSE: BLND), Intu Properties (LSE: INTU), Capital & Counties Properties (LSE: CAPC) and Derwent London (LSE: DLN).
The premise is that if the real-estate market in the UK – particularly in the south — continues to grow at a fast pace, assets that look expensive today could still be a bargain. Admittedly, this is not an easy call.
Hammerson, Intu Properties, British Land
Hammerson and British Land have enjoyed similar performances on the stock market in the last three years. The former is up 23%, while the latter has surged by 20%.
The rally in their stock prices has recently gathered pace and seems unstoppable. In the last 12 months, they have outperformed the FTSE 100 by 13 percentage points – and the gap has widened in the last six months. They both offer market-beating dividend yields.
As far as Intu Properties is concerned, its stock has dramatically underperformed both Hammerson and British Land in recent times.
These three real-estate investment trusts trade above 20 times cash flows, which suggests minimal upside and a high-risk profile in the current environment. Elsewhere, a rival such as Land Securities is about 30% cheaper based on its relative valuation.
Capital & Counties Properties, Derwent London
Capital & Counties Properties and Derwent London are smaller and less known to the wider public. These two could be hit hard if the property market in London doesn’t prove defensive.
Capital & Counties Properties’ core assets are based in Earls Court and Covent Garden. The ratio between its market cap of £2.8 billion and its trailing cash flows is above 100.
That would be “normal” for a fast-growing high-tech business, less so for a company whose revenue and earnings are not expected to rise as fast as they should in the near future. Moreover, its leverage could become problematic if the real estate market turns south. Its stock is up 3.3% this year, but is down by almost 14% since the end of February. Analysts have turned bearish, too.
Derwent defines itself as the largest real-estate investment trust in central London.
The ratio between its market cap of £2.8 billion and its trailing cash flows is about 30. The company boasts hefty operating margins, but its projected revenue growth trajectory isn’t particularly appealing. Its leverage is not incredibly high but is not reassuring, either. Derwent stock is up 10% this year and has more than tripled in value since the market rally that started in March 2009.
On the one hand, if properties in London continue their formidable run, Derwent would deserve attention – just like British Land and Hammerson. On the other hand, a bearish stance on real estate, spurred by a rise in interest rates, leaves minimal room for error.
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Alessandro doesn't own shares in any of the companies mentioned. The Motley Fool has recommended shares in ASOS.