There’s no need to snap up overpriced shares in newer funds when two heavyweight reits are so cheap.
The withdrawal of French real-estate investment trust Klépierre’s bid approach for its British peer Hammerson prompted a 10% drop in its share price – to a level 25% below the value of the bid. At 485p, Hammerson’s shares trade at a 39% discount to their 31 March net asset value (NAV – the value of the underlying portfolio), and yield 5.3%. Meanwhile, the shares of Land Securities, the largest UK real-estate investment trust (Reit), at 951p, trade at a 34% discount to their 30 September NAV and yield 4.3%, the interim dividend having risen by 10%.
Yet, despite the sector majors languishing at large discounts, share issuance at a premium continues elsewhere in the sector. Reit-related equity issuance rose to a new record of £4.92bn in 2017 says broker WH Ireland, “a strength that has carried through into 2018”. This contrast presents investors with a paradox.
The attraction of the new shares is supposedly a prospective dividend yield of close to or above 5% on the new shares, growing steadily over time. Clearly this is attractive, but not compared with what Land Securities or Hammerson are yielding. These are large, well-financed and well-diversified companies with proven management. Land Securities has a market value of £7.1bn, based on £14bn of UK property assets and moderate net debt of £3.2bn. The assets include £4.5bn in London offices, nearly all prime-central London, £3.6bn in shopping centres, £1.3bn in central London shops and £1.4bn in leisure and hotels. Hammerson, with a market value of £3.75bn, has £10.6bn of assets, almost all in retail property, but with 43% (by value) outside the UK. Net debt of £3.5bn is not excessive. Klépierre was seeking to thwart Hammerson’s agreed £3.4bn all-share acquisition of its UK rival, Intu, a deal which, thanks to shareholder opposition, may fail anyway.
The simple explanation for why investors are snapping up new equity at premiums to NAV while shunning old at large discounts is that they are bought by different investors. The new equity appeals to individual investors on the basis of an assured income, irrespective of the state of the broader property market. Institutional fund managers, who focus on the conventional companies, are shunning UK equities in general and the property sector in particular, while overseas buyers are even more averse. As Merrill Lynch’s regular survey of international investors shows, the popularity of the UK market has sunk to record lows. Disposable income has been squeezed as wage and salary increases lagged price rises, resulting in depressed retail and leisure spending. The rise of e-commerce continues to put pressure on the retail sector, while the cafes and restaurants brought in to try to rejuvenate high streets and shopping centres are suffering from excess capacity and cost pressures.
Despite this uncertainty, the issuers of new equity believe there are attractive niche markets, such as logistics warehouses, regional office buildings and social housing for rent. They may be right, but it is also likely that the gloom surrounding central London offices, retail property and leisure spending has been overdone. That is the view not just of one of Europe’s largest retail property companies, but also of the overseas buyers who continue to pour money into central London. Ignore the new issuances and buy Hammerson and Land Securities instead.