London-focused Capital & Counties Properties (Capco) has in recent weeks quietly re-emerged as a compelling rand hedge contender.
Capco, which is dual listed on the London Stock Exchange (LSE) and the JSE, and which was spun out of the late Donald Gordon’s Liberty International in 2010, lost favour among its loyal SA following from mid-2016 onwards.
The former market darling’s share sell-off was initially triggered by the UK’s announcement about its intended exit from the EU.
As uncertainty around Brexit grew, fears over dwindling property values and a slowdown in residential sales at Capco’s mixed-use Earls Court, one of the largest undeveloped sites in central London, drove its share price weaker.
The growing shift from bricks-and-mortar retail to online shopping further dampened investor enthusiasm because of the company’s exposure to the retail, food and beverage sector at its biggest asset, Covent Garden.
The tourist landmark consists of about 111,500m² of mixed-use lettable space and is located on the eastern fringes of London’s smart West End.
And then came Covid.
The pandemic has horribly compounded the woes of UK retail property owners due to lockdowns that have caused widespread tenant failures and rental arrears.
The result of it all has been huge value destruction: between early 2016 and October last year Capco’s share price slumped 80%, from just more than R100 to R20.
However, the stock has since recovered somewhat, to recent levels of about R29.
Two key events appear to be behind the rally: Capco’s sale of its Earls Court residential development and the acquisition of a 26% stake for £436m in fellow LSE-listed property owner Shaftesbury.
Shaftesbury is also a West End property investor and owns a mixed-use estate adjacent to Covent Garden consisting of more than 580 restaurants, cafés, pubs and shops.
Brendon Hubbard, portfolio manager at ClucasGray, believes the Earls Court sale allows Capco to focus on unlocking further value at Covent Garden, while the Shaftesbury acquisition means an extension of its central London footprint.
Hubbard describes Covent Garden as a "fantastic" asset, which, before the pandemic, lured more visitors a year than New York’s Times Square. He points out that Covent Garden has been "caught in the eye of the Covid storm" as tourism into the UK collapsed and London emptied out with the wide adoption of remote working.
It meant a write-down of Covent Garden’s value by 27% for the 12 months to December last year, to £1.8bn.
However, Hubbard believes the precinct’s high-end retail and restaurant offering is well placed to benefit from an expected rebound in tourism when vaccination programmes in the UK and Europe gain momentum and travel restrictions are lifted.
"Early evidence from travel companies already shows a surge in bookings in recent weeks as people tire of being under house arrest," he says.
Because of this, Hubbard says Capco is an attractive vaccine-related recovery play. "Investors now have the opportunity to buy great assets at a hugely discounted price."
Stanlib portfolio manager Ahmed Motara is equally upbeat about Capco’s recovery potential. He says the company has an opportunity to further entrench Covent Garden’s reputation among retailers as a sought-after flagship store destination, given the precinct’s strategic location in the heart of London.
The Shaftesbury deal, says Motara, will allow for better land assembly in the West End, an improved tenant mix and efficiencies over time.
Another positive is Capco’s "robust" balance sheet, with a loan-to-value of 28%, which Motara believes will help the company weather Covid-related pressures.
In past recessions and times of hardship the UK consumer has usually defied gravity and continued to spend
— Stephen Springham
"Capco has been well capitalised over time, so there are no financial stress concerns weighing on the business," he says.
On the downside, raising rental prices may prove challenging.
Prolonged lockdowns also remain a key risk and can lead to further asset devaluations, Motara says. However, he believes most of the pain in this regard has already been taken in 2020. "Put simply, if you’re an investor seeking retail exposure in the UK, Capco’s assets are among the most defensive."
Both Hubbard and Motara say investors should buy Capco for capital growth potential, rather than its dividends.
The company trades at a dividend yield of less than 1%.
It seems that management, under CEO Ian Hawksworth, has already made headway in refreshing Covent Garden’s tenant mix ahead of a hoped-for tourism revival later this year.
In December alone, four new brands opened shop in the precinct, including hip sneaker and streetwear store Kick Game, luxury Belgian chocolatier Neuhaus, traditional British coatmaker Mackintosh and vegan cookie concept Floozie Cookie.
That follows the recent opening of premier international fashion brands American Vintage and Ganni. Other new tenants coming to Covent Garden this year include jeweller Vashi and Italian trattoria Big Mamma.
Even if the tourists don’t return to London any time soon, local consumers are expected to support a recovery in UK retail spend this year. British real estate group Knight Frank predicts that UK retail sales will grow by 5% in 2021 (compared with –0.3% in 2020).
In a recent report on the outlook for the UK retail property market, Knight Frank head of retail research Stephen Springham says irrespective of the success of the country’s vaccination programme, 2021 will be a far better year than the "annus horribilis" of 2020.
He says that, contrary to every economic indicator, UK consumers are likely to "spend freely" as they emerge from the constraint of lockdowns and with considerable pent-up demand.
"While for many, optimism may be tempered by employment concerns, many others may find that constraint and restraint in 2020 have left them with a significant cash surplus," says Springham.
"And there is the comfort that in past recessions and times of hardship the UK consumer has usually defied gravity and continued to spend."
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.