Today I am looking at the investment prospects of three London leviathans.
Built on solid foundations
I have previously sounded out the terrific earnings potential of real estate investment trusts (or REITs) such as British Land (LSE: BLND) and Land Securities (LSE: LAND) as the British economy steadily clicks through the gears.
And my confidence was given a shot in the arm this week after Moody’s highlighted the breakneck pace of the sector, predicting that “London’s office real estate market will see rapid growth over the next 12-18 months.”
Moody’s added that “the pace of growth in London’s commercial real estate market will remain brisk, aided by the strong economy, regulatory limits on new construction and occupier demand,” noting that prime rents in the West End of the capital had grown by 5.8% between 2010 and June 2015.
And the ratings agency pinpointed Land Securities and British Land as major beneficiaries of this trend looking ahead, a view that is shed by the City’s army of analysts.
Land Securities is expected to enjoy earnings of growth of 4% in the year to March 2016, according to broker consensus, and a further 6% rise is predicted for 2017. These figures create P/E ratings of 27.8 times and 25.8 times respectively.
Meanwhile, British Land is anticipated to follow a 7% bounce in fiscal 2016 with a 6% advance the following year, producing a P/E ratio of 25.1 times for this year and 23.3 times for 2017.
Sure, both firms may appear expensive from a conventional perspective, but I believe the accelerating strength of the commercial and retail office space sectors — and particularly in London — fully merits this premium.
Furthermore, both of the REITs’ progressive dividend policies are expected to continue rolling for the foreseeable future. As a result Land Securities carries a yield of 2.7% for 2016 and 2.9% for 2017, while British Land boasts figures of 3.5% and 3.6% for 2016 and 2017 respectively.
Copper-coloured chaos
I am far less optimistic concerning the outlook for mining giant Antofagasta (LSE: ANTO), however, thanks to the worsening supply/demand balance washing across the copper market.
A steady flow of disappointing Chinese economic data sent metal prices to six-and-a-half year troughs last month around $4,450 per tonne. And the likelihood of further disappointing releases looks set to send copper shuttling still lower, particularly as the industry remains committed to swamping the market with excess material.
On top of this, the prospect of a steady strengthening of the US dollar should also put the kibosh on any meaningful recovery in commodity markets, particularly after the Federal Reserve touted further interest rate hikes in 2016 following Wednesday’s action.
Antofagasta is anticipated to endure a 58% earnings decline in 2015 thanks to collapsing revenues, and although the City expects a 55% bounceback in 2016, I cannot foresee this occurring as copper prices continue to tank. And given that the Chilean producer deals on a giant prospective P/E rating of 38.8 times, I believe Antofagasta is a risk too far at the present time.
