share prices by nearly a third, reflecting not just lower asset values, but the likelihood that investors will want a larger discount to net asserts to make up for risk.
Speculation, Speculation… Morgan Stanley believes the right discount before the risks of a double dip recession became apparent was just three per cent. Now, the bank says, it’s 15 per cent – owing not just to concerns about economic growth, but also to the likelihood that property will be even harder to finance as the debt capital markets dry up. Another negative is the fact that for the
past couple of years, the largest mainstream UK REITs have been developing huge amounts of new space. Morgan Stanley believes that much of it is speculative development, and that the likelihood of it being successfully leased is declining. Certainly there is evidence that developers are now having to offer six month or longer rent free periods and other sweeteners as a matter of course in order to land a deal. British Land has also had a little acquisition spree – rather worrying for some analysts since it has started buying sports facilities, hardly a core competence for a company that usually invests in major retail and office developments. Property companies have focused on
development of prime property in London. That’s what sells at the moment; City rents have increased from £45 a square foot in 2009 to £55 now, and the West End has seen good rental growth too. But there’s a huge amount of
development going on, and most of it will hit the market in the next couple of years.
At 88p Grainger shares, are
trading half net asset value.
Land Securities is working on 1.4m sqft of space, including Ashdown House (191,000 sqft), and Buckingham Gate (255,000 sqft) in London, and the £350m Trinity Leeds retail development, all of which will increase its existing portfolio size by nearly 15 per cent. It has also just received planning permission for 1 New Street, 250,000 sqft near St Paul’s. Meanwhile Great Portland has 12 near term projects, adding up to nearly 2m sqft, and is likely to start on a huge Bishopsgate project in the City. Three of the new generation of
skyscrapers will also come on stream by 2014, including the ‘Cheesegrater’ and ‘Walkie-talkie’, with more than 2m sqft of space between them. That has led some analysts to predict
that rents in the City could fall even lower than they did in 2009 – possibly below £40 a square foot. So by chasing ‘safe haven’ assets, prime properties in key urban centres, the major property companies may be contributing to excess supply – in which case the next bust might not be far behind. Perhaps it shouldn’t come as a surprise that residential agencies are finding life
“I think you will find in the next year that there is significant interest in residential REITs.” Alan Collett
easier going than commercial firms; housebuilders shut up shop during the credit crunch, while British Land and its peers have been spending money like it’s going out of fashion.
the ReSi Reit While there’s a reasonably sized commercial property sector, though, residential property is still difficult to invest in through the stock market. US investors have a choice of numerous residential property REITs, which hold housing stock, and pay their rental income out to investors as dividends. So far the UK hasn’t managed to create a corporate or institutional market in residential property. In the US residential companies make up nearly a fifth of all REITs (and in Europe, pension funds and insurers own large amounts of rented housing; so the abstention of institutional investors from this market is a purely British feature). There are very few options, and most of
them are quite specialised. Daejan Holdings is about half and half commercial and retail property, while Mountview Estates buys tenanted properties at a discount to vacant possession value, and sells them when they become vacant, so it’s a trader rather than an investment company. But there are two other possibilities – Unite and Grainger. Unite owns and operates student halls of
residence, with over 21,000 beds in 64 separate properties. Like other property stocks, it’s fallen from highs earlier this year; not only are there the usual worries about property prices, but some investors also predict higher university fees and more stringent visa checks will reduce the student population. Still, Unite’s properties are currently 99 per cent let for the next academic year, and the company plans to get 3-4 per cent improvement in rents, too. The market welcomed recent cuts to
senior management, which should save £2.5m annually. At a discount of more than 50 per cent to its net asset value, Unite looks very cheap; but of course its assets are very specialised, so it’s difficult to value them. Grainger also has a rather specialised
business, with old tenanted estates subject to rent controls plus a newer equity release and home reversions division, but its assets are ‘normal’ UK residental properties. It’s also now involved in managing repossessed assets for Lloyds Banking Group. Rents have been very strong – not news
to anyone in the residential market – with a rental uplift on new lettings of 12.8 per cent
PROPERTYdrum DECEMBER 2011 41
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