It’s true that most of the JSE’s UK property listings haven’t lived up to expectations in recent years, typically underperforming their rand hedge counterparts with exposure to Western and Eastern Europe.
However, some UK real estate investment trusts (Reits) have no doubt been oversold and appear ripe for a rerating.
London-focused Shaftesbury Capital is a case in point as the mega-merger between the former Capital & Counties Properties and Shaftesbury Plc two years ago starts to bear fruit.
The deal placed the combined entity as the largest commercial, retail and leisure property owner in central London’s trendy West End.
Shaftesbury’s portfolio spans more than 600 buildings worth £5bn in major mixed-use shop, dine, play and stay precincts, including Covent Garden, Carnaby/Soho and Chinatown.
Last month, the Reit delivered stronger than expected results for the year to December, with underlying earnings and dividends up 16.2% and 11%, respectively.
Annual estimated rental value (ERV) growth, a key indicator of tenant demand and leasing activity, came in at 7.7%, ahead of management’s earlier guidance of 5%-7%.
Retail sales in Shaftesbury’s portfolio are up 3.1%, while the vacancy rate dropped from 4.9% to 3.9%. Only 2.6% of space in Shaftesbury’s buildings is available to let when offers under negotiation are included.
The food and beverage portfolio, which includes about 400 coffee shops, restaurants and bars, has a vacancy of less than 1%.
Two weeks ago, CEO Ian Hawksworth also scored a major coup with the Norwegian sovereign wealth fund, Norges Bank Investment Management, which bought a noncontrolling 25% stake in Shaftesbury’s Covent Garden portfolio for £570m.
News of the transaction, which will provide a welcome cash injection to help Shaftesbury settle debt and expand its West End footprint, has sent the share price up 12% on the JSE.
However, at this week’s level of about R29.50 and a 3% dividend yield, the stock is still down 16% from its September highs of R37. That places Shaftesbury’s share price at a 38% discount to its net tangible asset value of 200p a share, which investment bank UBS believes presents an attractive buying opportunity.
UBS last month singled Shaftesbury out as one of its top UK Reit stock picks for 2025, with a 12-month target price of 155p. That’s 24% ahead of the 125p at which the stock was trading on the London Stock Exchange this week.
In a research report on the UK listed property sector, UBS says the West End retains its attraction as a global real estate and tourist hotspot despite weak sentiment towards the UK as an investment destination.
The investment bank cites uncertainty about the region’s economic growth prospects and the unpredictability of the potential direct and indirect impact of tariffs on the UK as key concerns.
Still, from an operational performance perspective, UBS says Shaftesbury’s portfolio has been a major beneficiary of resurgent tourist spending in central London. That’s particularly true for Covent Garden, Shaftesbury’s single most valuable asset (see graph) and one of London’s most visited tourist destinations.
The report refers to Heathrow Airport passenger numbers, which exceeded pre-Covid levels for the first time in March last year and grew throughout 2024. In December alone, passenger numbers were up 5.6% year on year.
UBS says the recovery in UK tourist activity has been supported by a 10% increase in North American passengers from pre-Covid peaks, likely due to the dollar’s relative strength vs a weaker pound.
UBS says Covent Garden, which was Shaftesbury’s strongest-performing location with ERV growth of 9.1% last year, offers further scope for growth given that rentals in the precinct are still about 4% below pre-pandemic peaks in nominal terms.
During a recent visit to South Africa, Hawksworth confirmed that retail and leisure spending in central London — the West End in particular — hasn’t been dampened by still-high interest rates and other macroeconomic issues facing the UK.
He believes the resilience of Shaftesbury’s portfolio lies in the diversity of its offering. For example, its food and beverage portfolio spans a range of tenants, from coffee shops and casual dining to Michelin star eateries.
Hawksworth tells the FM that the visitor tally at Covent Garden clocked in at 1-million a week in December. “We’ve never seen those sorts of numbers in the 19 years that we’ve owned Covent Garden,” he says.
About 74% of the precinct’s 220 buildings are let to retail, food and beverage tenants; the remainder comprises offices and apartments.
At current share price levels, you’re effectively paying less than £12,000 a square foot for a portfolio worth £19,000 a square foot
— Ian Hawksworth
Hawksworth believes the Carnaby/Soho precinct has the potential to become the next Covent Garden. Capital allocation will be skewed towards the area over the next five years, which he says is still “underrented and undervalued” compared with other central London destinations.
Asked why it’s a good time for South Africans to invest in Shaftesbury, Hawksworth says it’s simple: “At current share price levels, you’re effectively paying less than £12,000 a square foot for a portfolio worth £19,000 a square foot. So you’re buying into the best-quality property portfolio in one of the most desirable real estate destinations in the world at a 38% discount.”
Ahmed Motara, property analyst and portfolio manager at Stanlib, cites other reasons that Shaftesbury is a stock worth owning.
He says the company, which is the JSE’s second-largest property stock after East European mall owner Nepi Rockcastle and has a market cap of R58bn, offers currency and geographical diversification benefits — and a growing revenue stream.
He adds that Shaftesbury has a strong balance sheet with a relatively low loan-to-value of 27%, which will be reduced to 16% once the earnings-accretive Covent Garden deal with Norges Bank is completed.
Motara says the unique nature of the assets in Covent Garden and the rest of the West End portfolio should allow for “significant” rental upside to be captured over the next few years, which will support portfolio valuation growth.
How much share price upside is left will depend largely on interest rate movements in the UK. That aside, Motara expects a total accounting return of 8%-10% a year in the underlying portfolio over the medium term, which he says should translate into similar share price growth, assuming no rerating.
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