The long-awaited completion of a R100bn merger between central-London real estate plays Capital & Counties Properties (Capco) and Shaftesbury has placed the stock back on South African investor radars.
Capco, like most other UK-focused real estate investment trusts (Reits) with exposure to retail and leisure properties, was heavily sold down on the back of pandemic-induced trading and travel restrictions. Before then it was Brexit, and latterly recessionary fears brought about by higher interest rates and rising energy costs due to the war in Ukraine.
However, in the first two months of 2023 Capco’s share price has bounced back 38%, no doubt in anticipation of the merger, which has been in the making for more than a year. It finally became effective on March 7.
The combined entity now trades under the name Shaftesbury Capital Plc on both the JSE and the London Stock Exchange.
The merger places Shaftesbury in the position of being the largest property owner in the West End, which is widely regarded as London’s premier work, live, shop and leisure destination.
The Reit’s combined £4.85bn portfolio (£1.74bn from Capco and £3.11bn from Shaftesbury) spans 670 buildings and includes iconic mixed-use precincts such as Covent Garden and Carnaby Street, as well as several office blocks.
Though the share price has retracted somewhat since early March, in line with global market weakness after the collapse of SVB bank, analysts have placed a strong buy recommendation on Shaftesbury.
Though short-term prospects are likely to be bumpy as the world manages a higher interest rate environment, the company’s medium-term prospects look bright
The general view is that the stock offers plenty of value, given that it trades at a discount to NAV of more than 40%. That compares with Capco’s historic discount of less than 10%.
As Luqman Hamid, portfolio manager at Ninety One, puts it: “The newly created merger of Capco and Shaftesbury provides investors with a single entry point into some of the most attractive real estate on the globe.”
More importantly, investors now have the opportunity to gain exposure to prime central-London assets at a significant discount to market value, given global stock market volatility, he says.
Hamid cites Shaftesbury’s strong balance sheet, with a conservative loan-to-value of 31%, as another plus.
He adds: “Though short-term prospects are likely to be bumpy as the world manages a higher interest rate environment, the company’s medium-term prospects look bright, with expectations of strong earnings growth driven by exceptional rental demand.”
Capco was historically regarded primarily as a development and capital growth business when it was spun out of the late Donald Gordon’s property empire — the former Liberty International — in 2010. But it was converted to an income-paying Reit in 2019 after selling its Earls Court development.
Hamid says the merger will cement the counter’s status as a Reit by providing dependable earnings growth in a more secure and scaled entity.
Shaftesbury is led by former Capco CEO Ian Hawksworth. During a visit to South Africa last week, he told the FM that, notwithstanding the UK Reit sector being “very much unloved” at the moment, central London is booming.
“It took us a while to get the merger together, but it’s good timing, as there’s now a real operational traction in the West End,” he says. “There’s been a consistent improvement in foot count and sales in the past 18 months across the West End, which is starting to translate into rental growth.”
Shaftesbury’s portfolio of mixed-use precincts includes about 400 restaurants, clubs and pubs.
Hawksworth describes the area as one of the “most vibrant places in the world”.
He says the West End typically attracts about 200-million visitors a year. Tourist numbers to London as a whole are back to about 75% of pre-pandemic levels.
“North Asian and Chinese tourists are only starting to travel again. So that component is still missing,” Hawksworth says. London office workers have also returned to their desks, albeit only three to four days a week.
Shaftesbury’s more than 200,000m2 of retail and office space has a vacancy of less than 4%, while the company’s 700 rental apartments and restaurants have zero availability.
“Our portfolio is pretty much full,” says Hawksworth.
Looking ahead, Hawksworth confirms the focus has shifted to deliver predictable income and valuation growth, which will ultimately drive dividend growth.
“Investors shouldn’t expect the company to do big capital-intensive developments in the next few years,” he says. “The focus will be on integrating the two companies’ existing portfolios. It will be more about doing lots of little things well to continue to create wonderful spaces for our tenants and customers.”
Hawksworth says most of the action over the next 10 years will probably take place in three clusters: Covent Garden/Seven Dials, Carnaby/Soho and Chinatown.
He’s confident the additional scale that the merger brings will place the stock on the radar of more global investors looking for exposure to central London.
He says. “Our portfolio has been assembled over the past 35-40 years. There’s nothing like it anywhere in the world — you cannot replace it.”
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