MEPC stuck in property doldrums

The Investment Column

MEPC's shares have had a dreadful 18 months, retracing half the gains achieved in the 14 months of optimism that followed sterling's exit from the exchange rate mechanism. The retreat from a high of 558p in December 1993 to yesterday's 403p, up 3p, has made Britain's second-biggest property stock one of the FT-SE 100's highest yielding shares.

To be fair to MEPC, that dismal performance is as much about the troubled state of the property market as anything more specific to the company. With the sector in the doldrums, the market disregarded yesterday's jump in pre-tax profits from pounds 47.6m to pounds 60.4m, focusing instead on the unchanged 5.25p interim dividend and comments from the chief executive, James Tuckey, about still difficult trading and patchy tenant demand.

Earnings per share increased by an impressive 23 per cent to 10.2p but a rise in debt to pounds 1.26bn and a slight increase in the vacancy rate of the portfolio cast a shadow.

Mr Tuckey freely admits that the market is floundering without direction at the moment and he puts himself in the more pessimistic camp that expects the sector's recovery to be slower and less dramatic than optimists hoped for a year ago.

In retail, especially, it is difficult to know what is going on, with the big national chains appearing to be expanding their portfolios despite a string of gloomy consumer confidence figures and profits warnings.

In the important London market, demand in both the West End and City seems to be outstripping the ability of a nervous industry to supply new space, and rents are edging upwards.

Anecdotal evidence suggests that a sizeable West End office was assigned recently for about pounds 50 a square foot. When two floors of Alban Gate, MEPC's flagship City office block, are marketed later this summer, an asking price above pounds 40 a square foot is expected, which is well above recent lows.

The problem for MEPC, however, is that it will take more than the first signs of a thaw in the market to improve prospects of a decent rise in either net assets per share or the dividend. With a proportion of the portfolio let at rents higher than the current market rate, it will take sizeable rental increases before actual income improves to allow an improved payout.

Until that happens, the dividend, uncovered for several years and only barely matched by earnings last year, will remain stuck at the 20p level it has been at since 1991.

That means the shares yield 6.2 per cent, well in excess of the market average, but investors would be unreasonable to expect any less given the lack of growth and MEPC's indifferent record.

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