The R100bn merger between London-focused real estate heavyweights Capital & Counties Properties and Shaftesbury is paying off nicely for shareholders, judging by the 33% uptick in the share price year to date.
The combined entity, which has been trading as Shaftesbury Capital on both the LSE and JSE since early March, is now the largest property owner in the city’s West End — widely regarded as London’s prime work, live, shop and leisure destination.
The real estate investment trust (Reit) owns 670 buildings worth £4.9bn, spread across iconic mixed-use precincts such as Covent Garden, Carnaby Street, Soho and Chinatown. The portfolio includes more than 400 restaurants, clubs and pubs and several retail and office buildings.
Last week Shaftesbury released a decent set of maiden results for the six months to June, with foot count, turnover and rentals all moving in the right direction.
More than 200 leasing transactions were completed in the first half of the year, with rentals an average 5% ahead of December 2022 levels. Annualised gross income increased 5.6% over the same period.
Shaftesbury CEO Ian Hawksworth says trading in central London continues to rebound: both foot count and sales in the company’s West End locations are now 15% ahead of 2019 levels
Shaftesbury CEO Ian Hawksworth says trading in central London continues to rebound: both foot count and sales in the company’s West End locations are now 15% ahead of 2019 levels, which he says have been buoyed by increasing international visitor numbers.
Demand from tenants has also gained momentum, which bodes well for further rental growth. Year to date, 27 new retail and hospitality brands have been introduced across Shaftesbury’s portfolio.
Hawksworth says the company is already seeing the benefits of the merger in terms of a larger, combined platform and balance sheet.
He adds: “Despite the challenging macroeconomic backdrop, valuations are unchanged, reflecting the resilience of our exceptional portfolio.’’
The question for SA investors who don’t already own Shaftesbury shares is whether there’s further upside to be had? Or has the stock reached a ceiling at levels of about R30?
At first glance, the shares appear cheap considering Shaftesbury trades at a 36% discount to net tangible assets (NTA) of 194p or R46.56 a share.
But the stock isn’t necessarily undervalued.
Ahmed Motara, property analyst and portfolio manager at Stanlib, says on a price-to-book basis Shaftesbury may well offer better value than other JSE-listed rand hedge property counters such as Eastern Europe-focused Nepi Rockcastle and MAS Real Estate and German-biased Sirius Real Estate.
However, Shaftesbury trades at a considerably lower dividend yield than these stocks — at about 2.45% vs close to 5% for Sirius and 8%-10% for Nepi Rockcastle and MAS.
“Shaftesbury is not providing an enticing income yield, which is important at this point in time,’’ says Motara.
Shaftesbury is not providing an enticing income yield, which is important at this point in time
— Ahmed Motara
Brendon Hubbard, portfolio manager at ClucasGray, has a similar view. “Shaftesbury offers investors access to a high-quality portfolio — but the assets are priced accordingly.’’
In fact, he says Shaftesbury’s underlying properties are valued “quite richly” and probably don’t fully account for rising debt servicing costs and capital constraints amid a higher interest rate environment.
In other words, if the company had to sell its properties now, it may get considerably less than its last reported values.
Hubbard reckons the shares are therefore trading roughly in line with true market value. He also points to still-high administrative costs, which he says has been a niggling issue for shareholders for some time.
But Motara and Hubbard agree that Shaftesbury remains a good long-term buy for South African investors seeking rand hedge opportunities.
The company has an irreplaceable portfolio of prime central-London assets and is now the second-largest property stock on the JSE, with a market cap approaching R58bn
The company has an irreplaceable portfolio of prime central-London assets and is now the second-largest property stock on the JSE, with a market cap approaching R58bn.
Its market cap is topped only by Nepi Rockcastle’s R72bn. Growthpoint Properties, the JSE’s third-largest property stock and largest South African-focused Reit, trails some way behind at R45bn.
Motara says Shaftesbury’s loan-to-value ratio is at a “manageable” 31.7%. In addition, its newly enlarged portfolio offers pricing power and future rental growth will be supported by tenant mix improvements or redevelopments.
He adds: “Asset valuations are stable and potentially can grow from here, given the operational recovery under way. Downside risk to the portfolio is mitigated by possible cap rate expansion being offset by rental growth.’’
Ultimately, the short-term share price upside depends largely on when interest rates start falling in the UK. According to Hubbard, Shaftesbury’s share price will likely only rerate upwards once rates start dropping.
Says Motara: “Investors would be taking a view on how aggressively the Bank of England would consider reducing interest rates, which would likely have a positive impact on Shaftesbury’s asset valuations and finance costs.’’
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