Do you think the UK property market is undervalued and ripe for a long-term investment? I do. But I have long experience of buy-to-let, and that’s not the way I’d get into the sector today.
Instead, I reckon there are some tempting property stocks out there. I’m keeping a close eye on Hammerson and Primary Health Properties myself. I think they can provide more safety than the short-term risks associated with buying individual properties. They can get us into commercial property too, in a way that most of us just can’t do individually.
The retail sector is particularly interesting at the moment as sector weakness is putting downwards pressure on rental yields and share prices have therefore taken a hammering. But some of the falls must surely be overdone, mustn’t they?
Intu Properties (LSE: INTU) is one sufferer, having fallen by a massive 95% over the past five years. This means many bargain hunters may be eyeing it as a potential buy. On Monday, the share price leapt by 25%, but it’s still very cheap. So what caused the leap?
When I last looked at Intu, in November, a profit warning had just resulted in a big one-day price crash. Intu specialises in shopping centres, and they’re being especially hard hit by the retail slowdown. But the big red flag for Intu was the firm’s debt. Net external debt stood at £4.71bn at the interim stage at 30 June.
The company has made a couple of key disposals since then, which raised a total of almost £500m in 2019. That’s a help, but it’s still only small portion of the total debt. Then in January, Intu confirmed what we’d all been expecting, that it was “targeting an equity raise alongside its full-year results at the end of February.”
A further announcement on Monday told us that Intu “confirms that it is engaged in constructive discussions with shareholders, including the Peel Group and others, and new investors including Link Real Estate Investment Trust and others, in relation to a proposed equity raise” alongside the full-year results.
Though the price has spiked, Intu shares are still only valued on a tiny P/E of 1.7. That’s based on expectations for the year just ended and a predicted 33% EPS fall. But it will be influenced by forecasts for a further 16% drop in 2020.
That’s a stock priced to go bust if ever I’ve seen one. But that spectre must have receded some way now. So what should we do?
To be honest, I really don’t understand why investors are happy to pile into a stock on Monday’s news. If we had any idea of the shape of any refinance package, that might make a difference for me. But as we stand, we have no idea how much dilution a new equity issue will create.
I think it’s entirely possible that a rescue package could leave current investors with only a tiny portion of the newly capitalised company. And that portion could be worth less than Monday’s 16.8p per share.
Which is better?
So would I buy Intu shares over investing in buy-to-let? Right now, with Intu so speculative, I wouldn’t go for either. But I do think there are property stocks out there that are much better buys. I’m going to wait and see.
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Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.