Investment View: It's a good time to be a commercial landlord in capital
Increasingly, London might just as well be considered a separate country when set against the rest of the UK. It's more diverse, it's more liberal in terms of its social attitudes, and its economy is growing really rather nicely.
If you needed evidence for the latter there was a little more offered yesterday when British Land, the property company, announced that its half-owned Leadenhall Building (the Cheesegrater to you and me), a tower currently being constructed opposite Lloyd's of London in the City, will be 51 per cent pre-let.
BL's joint venture that owns the tower has agreed a deal to let 110,000 square feet to Amlin, a biggish Lloyd's of London insurer.
The towers springing up around London create a lot of debate. For me, the Shard looks rather horrible when compared to the simulations released before it was built. The Gherkin looked horrid in the simulations, but these days I quite like it. Regardless of what you think of them, it seems that the new ones are going to have tenants in them when they're built. Perhaps we shouldn't be surprised that an insurer has grabbed space opposite Lloyd's. The sector is doing very nicely, thank you. As a result, being a commercial landlord in central London is paying reasonably well.
The trouble is the market has caught up with this. British Land's shares have been on a sustained run recently and have just reached a new 12-month high.
BL is a Real Estate Investment Trust, which doesn't pay corporation tax if it pays 90 per cent of its income to shareholders as dividends (which are then taxed). It has total assets, owned or managed, of £16.3bn as of 30 September 2012 and the property portfolio is focused on prime retail (60 per cent) and central London offices (35 per cent rising to 40 on completion of current developments).
I'd be optimistic about London, less so about the retail part of the business, although BL's properties are in good locations. All the same, the shares still trade at a slight discount to their most recent net asset value per share (596p) and approaching 5 per cent compared to estimated full-year forecast net asset value per share. The forecast yield, at 3.8 per cent, is acceptable, if hardly stunning in today's markets.
The shares look to be fair value and I'd be inclined hold for now. If they show any sign of weakness and that discount started to move towards 10 per cent (the shares would need to fall to 540p) then I'd think about buying some more.
The same goes for Land Securities. It too has enticed an insurer to rent in a tower with a nickname: the "Walkie Talkie". It too is split between retail and central London offices and its shares have also been on a run. They also trade at a slight discount to net asset value and offer a similar yield.
The broker Charles Stanley notes that Land Sec's development programme is not predicated on growth; rather, the focus is on building more efficient buildings and making sure that break-even rents are fairly low. That, I find to be encouraging. Again, my recommendation would be to hold the shares, but be ready to dip in if they show weakness.
With Hammerson it's all about retail after the company sold its central London office portfolio for a pretty good price. Nothing wrong with that, although I remain wary of retail in general.
Hammerson shares again trade at a very small discount to the net asset value of its portfolio, and provide a forecast yield of about 3.6 per cent. Unless you bought very recently, Hammerson shares will have provided you with a very nice return. Given the state of the economy, and the prospects for retail I'd be inclined to take profits.
The same goes for Capital Shopping Centres. CSC offers a more robust forecast yield but that won't increase much going forward. However, as with Hammerson, the shares have performed very strongly and last month Charles Stanley noted that by most measures Hammerson was ahead. With performance likely to be broadly flat, there's a strong argument to take profits on CSC, as with Hammerson, even though the income you'll get from holding the shares is respectable enough.
Segro is a bit different, with a property portfolio that comprises £4.8bn of predominantly industrial assets concentrated around business centres and transportation hubs. Trading at 70 per cent of net asset value, the shares sit at a substantial discount and offer an impressive yield of 6.2 per cent. Segro helps demonstrate the point about London. Its fortunes are much more closely tied to economic growth in the UK as a whole.
While Segro ought to benefit from the low levels of quality industrial space available and limited speculative development, the economic outlook is a worry. But the shares' price reflects that worry and so are worth holding on to for the moment.
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