It seems that appetite for UK property stocks is finally on the mend after a multiyear decline on the back of continuing Brexit uncertainty, a sluggish economy and weak retail spending.
The London Stock Exchange’s real estate sector has delivered a total return of 15.4% (in rand terms) year to date, pipping other global regions to the post, according to the latest figures from Anchor Stockbrokers. The next best performer was the US with 15.1%, followed by Europe (9.6%) and Australia (8.5%). SA property stocks have had a total return of only 5.3% year to date. Despite the recent uptick in UK-listed property prices, many are still trading at discounts to NAV of 20%-plus, which raises the question: should SA investors start increasing their allocations to the region?
The JSE offers 10 or so property counters that offer partial or 100% exposure to the UK. These include Capital & Counties Properties, Intu Properties, Hammerson, RDI Reit, Tradehold, Stenprop, Atlantic Leaf Properties and Capital & Regional.
Despite the apparent value proposition on offer, most SA analysts remain cautious given the lingering uncertainty about if, when and how Brexit will play out.
The general view is that investors need to carefully assess the prospects of individual counters and the specific sectors to which they are exposed.
"There is substantial value to be had on an individual stock level. But it is now all about stock picking — irrespective of Brexit uncertainty," says Craig Smith, head of real estate research at Anchor Stockbrokers.
The performance of different JSE-listed counters year to date suggests that the rebound has been patchy. In fact, the gap between the best-and worst-performing UK-focused property stock is a hefty 36% — Stenprop’s share price is up 17% against Capital & Regional’s decline of 19% (see table below).
Stenprop owns mostly logistics, industrial and office properties, while Capital & Regional is exposed to the retail sector. Logistics and industrial-focused Atlantic Leaf Properties, which last week reported a 2.2% increase in dividends (in sterling) for the year to February 28, has had a 7.7% rise in its share price year to date. Retail-focused stocks such as Intu Properties and Hammerson remain under pressure.
Stanlib investment analyst Lawrence Koikoi says the polarisation in the UK property sector is likely to continue.
He notes that sentiment about retail-focused stocks is being affected negatively by increased penetration of online shopping and a rising number of brick-and-mortar retailers that have been hit by falling sales, forcing many to sign company voluntary arrangements (CVA) with landlords. These provide rent relief to struggling tenants.
The opposite is true for UK office-focused property stocks, which Koikoi says have benefited from improved investor sentiment due to fewer-than-expected banks and other financial institutions moving their head offices from London to Europe in the run-up to Brexit. In fact, office take-up in London increased by 19% in 2018 against 2017.
So most nonretail property funds have actually experienced record leasing activity over the past 12 months, with total vacancies decreasing by 110 basis points to 5% in the fourth quarter of 2018 year on year.
Investec Asset Management portfolio manager Peter Clark believes that UK retail property fundamentals are nowhere near as dire as is suggested by the share prices of retail-focused property stocks.
While retail landlords have felt the pressure of declining valuations on their balance sheets and CVAs have had a marginal 1%-2% negative impact on the dividend payouts of listed retail funds, Clark says UK retail tenants are not necessarily closing shop.
"The trend among retailers is to retain and even consolidate retail space within large, dominant malls. These malls are mostly owned by listed companies. Thus the share price action appears severely overdone."
Clark refers to Hammerson as a good example of a UK-dominant retail landlord that has been caught up in negative sentiment, despite the company managing to maintain high levels of occupancies and positive leasing spreads.
"Hammerson’s balance sheet remains well structured even at gearing levels in the high thirties. Almost half of its asset base is situated outside the UK.
"Furthermore, its dividend remains intact and cash- covered. This alone offers an attractive return profile excluding any share price improvement."
Industry players say that apart from sectoral exposure, SA investors also have to consider different currency diversification options.
Speaking at Atlantic Leaf’s results presentation in Joburg last week, CEO Paul Leaf-Wright said there is a view that the pound is undervalued relative to the euro and dollar.
He said many would-be investors were on the sidelines, waiting for a Brexit outcome.
"US fund managers, in particular, are looking for currency diversification opportunities away from the US dollar. So we expect a lot of capital inflow into the direct and listed property market when political stability returns to the UK," he said.
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