Some shares have bounced back quickly from the stock market crash. But some haven’t. The UK’s commercial property stocks have been among the biggest casualties. Office and retail landlord British Land (LSE: BLND) has fallen by 40% this year, compared to 20% for the FTSE 100.
No one wants to take on shops or offices at the moment — the only hot properties are warehouses. I think the property market will return to a more normal balance over time, so I’ve been buying unloved commercial property shares recently.
London property I’ve bought in the stock market crash
Central London has been a thriving business, leisure and travel hub for 1,000 years. This has never changed, despite the Black Death, the Great Plague and the 1918 flu pandemic. I don’t think that it will change because of coronavirus either.
I’ve already mentioned FTSE 100 REIT British Land. This £3.5bn group owns a mixture of London offices and UK retail property, such as Meadowhall and Ealing Broadway.
So far this year, British Land’s office properties have helped protect the firm from the impact of lockdown — collection of office rents is running at 88%, compared to 36% for retail. The situation is difficult, but British Land went into this crisis with fairly low levels of debt and plenty of cash.
At the end of March, management said that its property values could fall by 45% before it would be at risk of breaching its lending conditions. I don’t expect this to happen.
As I write, British Land shares are trading at a 50% discount to their 31 March book value of 774p. Although I expect property values to fall a little further, I think this is likely to be a good long-term buying opportunity.
I’ve also been buying a second London property stock in the stock market crash. FTSE 250 REIT Shaftesbury owns 15 acres of London’s West End, including Carnaby, Covent Garden and Soho.
The loss of the tourist trade has hit the group’s shops and restaurants hard, but this is a unique location. I’m confident that Shaftesbury’s fortunes will improve as tourists return.
In the meantime, the shares are on sale at a 40% discount to their book value. I see this as a long-term bargain.
Hedging my bets
Coronavirus isn’t the only problem for landlords. The relentless growth of online retail was already causing problems before the stock market crash.
Personally, I think big landlords will find tenants and new uses for shopping centres. But in order to hedge my bets and profit from the growth of online retail, I’m also considering buying into warehouse owner Tritax Big Box REIT (LSE: BBOX).
This FTSE 250 REIT owns distribution warehouses, of the kind needed by Amazon (a major tenant) and other online retail giants.
Tritax issued a solid set of half-year results last week, showing good levels of rent collection and stable earnings. The group’s half-year dividend was cut by 9% to 3.1p per share, but the company hopes to be able to return the payout to growth when visibility improves on rental income.
At the time of writing, Tritax shares offer a dividend yield of about 4% and trade in line with their book value of 155p per share. Although I don’t see Tritax as a bargain, I do think the shares should provide a reliable dividend yield and good protection against the retail slump.
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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Roland Head owns shares of British Land Co and Shaftesbury. The Motley Fool UK owns shares of and has recommended Amazon. The Motley Fool UK has recommended British Land Co and Tritax Big Box REIT and recommends the following options: long January 2022 $1920 calls on Amazon and short January 2022 $1940 calls on Amazon. 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.