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Categorized | Property

UK property stocks’ rollercoaster ride

Posted on November 18, 2016

What does this show?

This chart shows the best and worst five share price performers among UK property stocks in 2016 — a nail-biting period for real estate, in which the Brexit vote shocked the market and the closely watched IPD quarterly index of total returns from the asset class saw its first fall since 2009.

Why is Secure Income Reit so far ahead?

An eye-catching feature of Secure Income Reit is that it owns the theme parks Thorpe Park and Alton Towers. But that isn’t why investors have shown it so much love this year.

“It has pretty much the longest leases of any Reit [real estate investment trust] in the UK. We’re talking 20 years,” said Chris Spearing, analyst at Canaccord Genuity.

Long leases, whether to Merlin — which runs Alton Towers — or to Travelodge, which runs 55 hotels that Secure Income bought in September, mean fairly safe income. Investors expect this company will do what it says on the tin.

Aim-listed Secure, which floated on London’s junior market in 2014, says it expects to generate a dividend yield of 6.5 per cent a year over six years. It also has high-profile management: Prestbury Investments, which advises Secure, is chaired by Nick Leslau, the well-known property investor.

Why have others slid down the property rollercoaster?

The post-referendum investment climate has not favoured companies exposed to London offices, which might suffer if companies cut their presence post-Brexit, or those with large development pipelines, seen as risky.

Hence the 46 per cent drop in the share price of Helical Bar, which holds almost half its investment portfolio in London offices. Some 15 per cent of its holdings were development stock as of June, although retirement villages feature most heavily here. One of its largest shareholders is the fund manager Aberdeen, whose property fund sold some assets abruptly after the referendum as investors withdrew their cash.

Like Thorpe Park’s famous Saw ride, Helical rose steadily before its drop. Its share price doubled between the start of 2013 and the referendum. But given that the company is chaired by the respected property industry figure Mike Slade, and its chief executive is company veteran Gerald Kaye, investors should not write off the chances of returning to growth.

Indeed, the consensus broker rating on the stock is a “buy”, according to Hargreaves Lansdown.

What about the other losers?

Development exposure is a theme among those whose share prices have fallen; Derwent London specialises in building London offices, while Market Tech, which owns swaths of Camden, has a large mixed-use development site at Hawley Wharf.

Inland Homes builds residential properties in London and the south-east, while Capital & Counties has a 77-acre development site in Earl’s Court, which has suffered from a downturn in high-end London homes.

Mr Spearing says that some selling-off of property stocks had begun before the Brexit vote. “Equity markets start discounting when they perceive that values are reaching a peak,” he said.

And the winners?

While Secure Income Reit has climbed higher than any other stock, the other risers also offer the prospect of steady growth. Assura and Primary Health specialise in healthcare properties, which tend to be let on long leases to public-sector entities.

Regional Reit has no London exposure, and also holds several industrial properties — a sector currently in favour. Tritax Big Box, another riser, owns distribution warehouses, which are seen as benefiting from the increase in e-commerce.

So what’s the outlook?

This is the big question. Property companies in general hold much less debt than they did ahead of the financial crisis, which will help them to be more stable; their yields are far above the risk-free rate, another point in their favour, said Mr Spearing.

But for London especially, much depends on how the Brexit process plays out, and political risks are notoriously hard to predict. So don’t forget to fasten your seat belts.