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the City of London, where rents have been increasing, did well, while retail property had less attraction for investors. Analysts will also look at a company’s
current developments; whether they are pre-let, or speculative, how much risk is involved, and how they are funded. For instance, broker KBC Peel Hunt currently prefers Land Securities to British Land, because it has a better development pipeline. However the discount to net asset value will be the main valuation metric, and the qualitative research merely provides a reason why one share should trade at a lower discount (or a higher premium) than another. Even the history of net asset value per
share can be interesting, since it shows how successful the company’s management has been in the past at growing the company’s assets. Did developments create capital appreciation, or did the company only get back what it spent on them? When trading properties, has management been able to buy properties that increased in value, through creating marriage value, or spotting undervalued sectors or properties?
Recovery will be ‘corrugated’
and, for some, it will be a rough ride over the next
couple of years.’ MIKE PREW PROPERTY analYsT, nOMURa It’s intriguing to look at what the City is
saying now about the prospects for commercial property. By March 2010, share prices in the property sector had already doubled since the trough in early 2009, with good news coming in on property values and rental levels, particularly in London. Though the Greek crisis burst the balloon temporarily, property shares are back up again, slightly higher than they were at the start of the year, and mostly trading at a premium or a very slight discount to their asset values. Analysts and fund managers are split in
their assessments of the situation. Julian Smith, head of the F&C UK Property fund, thinks it’s time for investors to move back into property, believing demand for
60 FEBRUARY 2011 PROPERTYdrum
Helical Bar has done well by buying sites without planning permissions – and then gaining them.
property will increase as the economy recovers. F&C set up a new open-ended fund in June, to buy up discounted commercial properties. But some analysts believe the focus on
fast capital growth in the past year led to overvaluation. Mike Prew, property analyst at Nomura, believes the recovery will be “corrugated”, and it will be a rough ride for investors over the next couple of years. He complains that while the sector is really all about income, investors in REITs this year have all been chasing leveraged capital growth; the way some property companies have been buying up liquidated portfolios at a discount has been encouraging them. The other interesting conundrum is how
property shares, whose assets are valued on yield, might perform in an environment of increasing interest rates. Commentators have focused most on the housing market, where an increase in rates would push up monthly mortgage bills for home-owners, and could force repossessions. Rising rates would work differently in commercial property; increasing interest rates on gilts would compress the spread between gilt yields and property yields, and could lead to upward pressure on yields. That, invariably, would mean downward pressure on property prices.
If property prices start dropping again,
as they did in 2007-8, we could see a chain of dominoes. Investors will want to build dropping prices into their assessment of property shares, so they will probably value the shares at a 10-20 per cent discount to net asset value. The geared effect of property prices and
the price to book ratio, dropping, could see property shares lose half their value, just as they did in 2007-8. And rental values don’t give protection
from an increase in yields, as most groups report rents outside the City as flat or dropping. Fund managers have been pulling back on further purchases, believing that the sector is flattening out. And while property shares still deliver a good yield compared to other investments, they look expensive compared to their historical prices. That all makes the sector look rather
exposed right now. No one seems to be betting on another
crash, indeed DTZ’s ‘Wall of Money’ report estimated that investors would put another $112 billion into European commercial property in 2011. However, commercial property’s ‘safety’
value as an investment does appear to be somewhat exaggerated, and even if there’s no crash in the offing, it does appear that further returns for shareholders in property investment companies could be somewhat muted.
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