Smaller Companies: London Industrial cashes in early on demand for property shares

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The Independent Online
WITH private property companies thought to be lining up stock market flotations worth pounds 1bn for the New Year, London Industrial may be glad to have got its stock market debut away in the run-up to Christmas.

First dealings in the London- based property investor's shares will be on Wednesday, a week after 5 million shares were placed with institutions at 320p, valuing the company at pounds 29.3m, a small premium to pro forma net assets of pounds 28.8m.

Selling the shares for more than their underlying value is a testament to the renewed enthusiasm in the City for the property market. The sector has more than doubled since sterling's exit from the ERM, easily outstripping the rest of the stock market.

Private investors tempted by London Industrial should realise that the company, while operating in broadly the same market, is influenced by very different factors than, say, Land Securities, the largest landlord in the UK.

The biggest property companies have benefited this year from a resurgence of interest from international investors in prime City and West End properties.

These high-profile buildings tend to have long (25-year) leases and blue-chip tenants. By the standards of the property industry, they are safe investments and so their value is determined in relation to other securities such as long gilts. As the yields on government securities have hardened property has followed suit.

London Industrial, however, specialises in buying small commercial buildings in unfashionable locations for rent to small traders on short tenancies. Typically, these are for three years with notice periods of only three months. It is a very different sort of market.

That is not to say that you cannot make good money. The yields available on second-line buildings (13 per cent on a recent pounds 8.5m acquisition by London) make the annual returns from big, central office blocks pale into insignificance.

That leaves plenty of scope for capital appreciation if the good news boosting the prime market trickles out to the periphery. But it would be wrong to assume that because the mainstream property market has performed, London Industrial will do so as well.

The keys to London's performance are more mundane. It must drive up occupancy levels in its 900 rental units (in 31 buildings) from the current 77 per cent to nearer the 96 per cent it achieved in 1989. That will have the double benefit of pushing up the rent roll and increasing recovery of service overheads.

The second important influence on profits will be keeping the bad- debt ratio to its impressive level of less than 1 per cent of rents.

That will be determined by the rate at which businesses go bust and the quality of London's financial controls.

With such short leases the company's task is more akin to a hotel operator than a property company, and it is similarly vulnerable to short-term economic swings.

Certainly there is nothing in the profit record to suggest any need to rush into the shares. Profits in the year to March were pounds 1.03m, up on 1992 but well below the results achieved in 1991 and 1990. After an interim profit of pounds 355,000, a full- year total of about pounds 700,000 seems likely.

That, and a proposed 7p dividend offering an unexciting 2.7 per cent yield, is hardly a recipe for a big first-day premium.