How Rising Property Prices Affect Land Securities Group plc, British Land Company plc, Hammerson plc, SEGRO plc & Intu Properties plc

Land Securities Group plc (LON:LAND), British Land Company plc (LON:BLND), Hammerson plc (LON:HMSO), SEGRO plc (LON:SGRO) and Intu Properties plc (LON:INTU) have benefited from higher property valuations.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Rising prices across the real estate sector have boosted the value of many real-estate investment trusts (REITs). Because of this, earnings per share for many REITs have been inflated by valuation gains, which are non-recurring. Although valuations have risen, rental yield compression has meant that rental income has actually grown much more modestly.

Land Securities (LSE: LAND), British Land (LSE: BLND) and Hammerson (LSE: HMSO) are the three largest UK listed REITs, with a combined market capitalisation of over £24 billion.

  Price/NAV Price/Underlying Earnings Forward Dividend Yield (%) 
Land Securities  0.99   32.0  2.5
British Land  1.05    28.6  3.3
Hammerson  1.05 

  28.3

 3.2 

These three large-cap REITs are valued between 0.99x to 1.05x their net asset values (NAVs), with Land Securities being the cheapest and also the lowest yielding. This reflects the relatively larger size of Land Securities’ development portfolio, as the company sold much of its investment portfolio in recent years to fund new developments. But, the potential for greater valuation gains from its development pipeline, which is particularly concentrated in London, makes Land Securities probably the most attractive of the three. British Land also has significant exposure to London office space, a market which attracts almost unparalleled global investments and benefits from low vacancy rates. Hammerson’s much smaller exposure to London makes it relatively less attractive. 

The following smaller REITs are higher yielding and seem to have greater potential for capital appreciation:

SEGRO (LSE: SGRO) focuses on warehousing and light industrial properties across eight European countries, but principally in the UK, Germany, France and Poland. This geographical mix positions the company to benefit from the ECB’s asset buying programme, which will likely lead to higher asset prices. In addition, yields on similar properties tend to be much higher yielding in Central and Eastern Europe. Although valuation gains on industrial units have so far been limited; investment yields have been far greater. SEGRO’s portfolio of under development properties have a projected yield on total development costs of 8.6%. On the opposing argument though, vacancy rates are typically higher and vary more substantially over the business cycle. The company’s latest trading update in April showed vacancy rates actually increased to 6.7% during the first four months of 2015, from 6.3% in 2014.

SEGRO is currently trading at a 10% NAV premium; but the combination of high yielding developments and further potential for substantial valuation gains means the premium is deserved. Its shares have a forward dividend yield of 3.7%.

Intu Properties (LSE: INTU), the shopping centre focused REIT, is currently trading at an 11% discount to NAV. Declining underlying earnings, caused by falling like-for-like net rental income, have caused investors to fall out of favour with intu. Large sized shopping centres, including intu Trafford Centre, intu Lakeside and intu Metrocentre, represent the bulk of the value of intu’s assets. These properties have fared better than smaller town centres, with strong valuation gains and growth in like-for-like rental income. The mix of underperforming assets with some very prime assets is the main cause of the REIT’s low valuation.

Intu’s dividend is likely to remain unchanged at 13.7 pence per share this year, as underlying earnings remain weak. This gives an indicative dividend yield of 4.1%, which is higher than any of the other REITs mentioned. Looking forward, the improving outlook in the retail sector could lead to higher rents, which should pass through to higher property valuations.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Jack Tang has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Mature couple at the beach
Investing Articles

6 stocks that Fools have been buying!

Our Foolish freelancers are putting their money where their mouths are and buying these stocks in recent weeks.

Read more »

Black woman using loudspeaker to be heard
Investing Articles

I was right about the Barclays share price! Here’s what I think happens next

Jon Smith explains why he still feels the Barclays share price is undervalued and flags up why updates on its…

Read more »

Investing Articles

Where I’d start investing £8,000 in April 2024

Writer Ben McPoland highlights two areas of the stock market that he would target if he were to start investing…

Read more »

View of Tower Bridge in Autumn
Investing Articles

Ahead of the ISA deadline, here are 3 FTSE 100 stocks I’d consider

Jon Smith notes down some FTSE 100 stocks in sectors ranging from property to retail that he thinks could offer…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

Why I think Rolls-Royce shares will pay a dividend in 2024

Stephen Wright thinks Rolls-Royce shares are about to pay a dividend again. But he isn’t convinced this is something investors…

Read more »

Investing Articles

1 of the best UK shares to consider buying in April

Higher gold prices and a falling share price have put this FTSE 250 stock on Stephen Wright's list of UK…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

The market is wrong about this FTSE 250 stock. I’m buying it in April

Stephen Wright thinks investors should look past a 49% decline in earnings per share and consider investing in a FTSE…

Read more »

Black father and two young daughters dancing at home
Investing Articles

1 FTSE 250 stock I own, and 1 I’d love to buy

Our writer explains why she’s eyeing up this FTSE 250 growth phenomenon, and may buy more shares in this property…

Read more »