Share prices in the property sector crashed by more than 20% in mid-2016 as soon as the news of the Brexit vote came through. In the year following, panic has been replaced by caution. Share prices have recovered, but not to pre-vote levels, and they mostly stand well below the peaks reached in late 2015. Economic uncertainty means that demand from new tenants is subdued and few new developments have been announced. Yet the market has performed much better than many expected. Property returns have fallen in the last year, but have still been positive.
Confidence in the long-term outlook has been demonstrated by a series of eye-catching transactions. In March, the "Cheesegrater" building in the City was sold to CC Land for £1.15bn while in July, records were broken when Chinese food giant Lee Kum Kee paid £1.3bn for Land Securities' "Walkie Talkie" building. And while house prices have flattened out, this trend was apparent before the Brexit vote and is attributable to tax hikes and to prices, particularly in and near London, becoming over-extended. Retailers are becoming increasingly cautious, to the detriment of rentals, and hence valuations of shops and shopping centres, reports estate agent Savills but this is at least as much attributable to the growth of online shopping as to weakening confidence. A sharp fall in investment in new space in recent years has limited the impact.
On the other hand, the growth of online shopping has buoyed the market for "big sheds", as evidenced by strong results from industrial property company Segro in the first half of this year. Growth in demand for these large warehouses means that, unusually, industrial property is now the hottest part of the market. As a result, Segro shares trade at a 5% premium to net asset value, while the shares of commercial property companies Land Securities and Hammerson trade at discounts of over 25%, British Land at over 30% and Intu at over 35%.
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Marcus Phayre-Mudge, manager of the TR Property Investment Trust (LSE: TRY), describes the market as resilient. "Yields are not rising, but demand for space has weakened a bit as businesses are starting to defer investment. Development activity has fallen off, but new supply of completed buildings is not coming through, owing to a sharp fall in investment in recent years." At the same time, bond yields remain low, enabling companies to refinance debt cheaply and making the income attributes of property relatively attractive. Nearly two thirds of TR's portfolio is in Europe, where share price returns have benefited from a pick-up in growth, from attractive dividend yields of 3.5% to 4% (compared with 0.5% on 10-year German government bonds) and from companies reducing the cost of their debt. Still, TR's gearing (the ratio of debt to shareholders' funds) is 15%, which is near the top of the historic range. This indicates the manager has a positive view on both Europe and the UK.
"Lots of investors are taking advantage of the weakness of sterling to buy UK assets," says Phayre-Mudge. "They are looking well past Brexit, which is seen as a short-term domestic problem." He points to the strength of balance sheets and sees long-term value in the UK, even in the London-focused office companies such as Great Portland and Derwent London, which are trading on 25% and 20% discounts repectively. Current uncertainty provides a great long-term buying opportunity across the sector.
The craze for urban art
Graffiti is the "latest must-have for developers", says Andrea Marechal Watson in The Daily Telegraph. Well-executed works fit into the "creative place-making" mantra loved by architects and planners. Developer Galliard has pledged not to "hurt" the famous "Shoreditch Art Wall" in London during the construction of The Stage, a new 37-floor project. Indeed, a collection of pop-art illustrations by a local street artist is on show in the marketing suite. Down the road at The Hudson, a collection of six apartments by HC Development, a work by famous graffiti artist Banksy is due to be installed in September. The decor will be "heavily influenced by the industrial gritty urban feel that is synonymous with Shoreditch".
Max has an Economics degree from the University of Cambridge and is a chartered accountant. He worked at Investec Asset Management for 12 years, managing multi-asset funds investing in internally and externally managed funds, including investment trusts. This included a fund of investment trusts which grew to £120m+. Max has managed ten investment trusts (winning many awards) and sat on the boards of three trusts – two directorships are still active.
After 39 years in financial services, including 30 as a professional fund manager, Max took semi-retirement in 2017. Max has been a MoneyWeek columnist since 2016 writing about investment funds and more generally on markets online, plus occasional opinion pieces. He also writes for the Investment Trust Handbook each year and has contributed to The Daily Telegraph and other publications. See here for details of current investments held by Max.
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