Should you invest in property?

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The Independent Online
ONE SECTOR of the stock market that should have been particularly cheered by last week's cut in base rates was the recently renamed Real Estate grouping, or good old property companies. "The key thing is the decline in interest rates," says Jeremy Batstone of NatWest Stockbrokers.

"People regard the property sector as a safe haven when interest rates are falling. If you can get a 6.5 per cent yield on assets and still have those underlying assets appreciating, then that is a much more attractive return than you can get from a bank or a building society."

The other important element is the tangible assets, namely land and buildings, that property companies have and the value of these assets in relation to the share price. William Hemmings, manager of Aberdeen's Property Share fund, says: "The primary driver of the Real Estate sector is net asset value (NAV). The sector is always difficult to justify when it is at a premium, but currently the big companies are standing at a discount of around 7 per cent, while for some of the smaller companies it is up to 25 to 30 per cent."

Vince O'Brien of Norwich Union says: "There is a pretty strong argument for property to outperform relative to the other two main asset types. The 1990s have seen a bull run in fixed interest and equities have not been doing badly either. Now investors are looking for property to catch up."

Robin White of Liberty International, responsible for the recently launched Portfolio Property Fund unit trust, says: "The fundamentals are strong in the underlying property market. The demand/supply balance is much better than in the 1980s, the last time we had rental and capital growth coming through quite so strongly. Overall, rents don't seem to be that high, especially when you consider there is capacity for rental growth, and you have an attractive income stream ."

Vince O'Brien says: "The property sector is very much a defensive story. Property stocks are offering a good yield and if we do get an equity market crash, property is a good place to have your money if you want to sleep at night."

Robin White adds: "Inflation is starting to creep back into people's consciousness. When this happens, property becomes an attractive segment of a portfolio, because it is reasonably well protected on the downside if things go wrong."

Property stocks are also a recovery story, says Vince O'Brien. "In 1998, property shares had a terrible time, but they have bounced this year. We would say there are still parts of the sector undervalued."

William Hemmings adds: "This year we have seen strong relative performance. To the end of last month, the All Share was up 6 per cent, but the property companies were up 23 per cent. This is partly because the sector had a torrid time in the second half of 1998 and is recovering, but given the large number of smaller companies in the sector it has also benefited from the `small cap effect'."

Robin White adds: "We saw some massive premiums to NAV last year. Last April, the asset value of Land Securities and British Land needed to rise 35 per cent just to equal their share prices. Now, you are able to buy into most companies at what is effectively break-up value, after taking debt into account."

Vince O'Brien adds: "The property sector has yet to be rerated. Property companies are sitting on portfolios with yields of close to 7 per cent, compared to the late 1980s, when property yields were below gilt yields. So you are getting equity-type yields combined with rental growth. The 7 per cent yield will come down to around 6 to 6.25 per cent over the next year, and this will give a capital appreciation of 12 to 15 per cent, and you have the benefit of the high yield in the meantime."

Robin White says: "Look at the running yields on the individual companies that have just reported.Land Securities has a 6.6 per cent running yield that was virtually unchanged on the year before. That means there is a reasonable potential for the yield to be shifting downwards. At the same time, the dividend yields are also reasonable.

"When Great Portland announced its results last week, its shares were on a 17 per cent discount to its asset value and it doesn't have any potential tax liabilities. Taking its debt into account, you would still be buying on a discount of 10 per cent with a yield of around 4 per cent and the benefit of gearing. That looks pretty good value."

There are 109 shares in the Real Estate sector, but only a handful of large caps. Jeremy Batstone says: "The major property stocks are British Land, Land Securities, MEPC and Hammerson. After their major reporting season the results have generally come out with NAV above market expectations, which is in line with the UK experiencing an economic `soft landing'."

William Hemmings says: "The positives in the sector definitely outweigh the negatives at the moment. Companies are matching expectations. These expectations are going to rise."

William Hemmings adds: "If I had to pick out an area to favour it would be City offices, through specialist stocks like Minerva."

Jeremy Batstone says: "The smaller property companies are slowly being eaten by the bigger ones. The larger property companies realise they can get better value than looking for bigger deals elsewhere.

"Many companies are focusing towards the higher quality parts of the sector. British Land recently bought the Meadowcroft Centre in Sheffield in a move from its traditional heartland in the City where the potential for asset growth is limited. It raised finance from securitising part of the Broadgate estate, which provided resources to move into other areas, such as retailing."