Management of Land Securities (LSE: LAND) unsurprisingly blamed Brexit this morning when its first-half results revealed a £95m loss, down from a £707m profit this time last year. But does this dramatic reversal for the UK’s largest listed commercial property company represent a taste of things to come for other domestic equities?
Possibly. In the short term the cause of Land Securities’ loss was unique to REITs but over a longer time frame we know that the sector can often act as an accurate bellwether for the health of the economy as a whole.
A negative outlook
The prime reason for Land Securities’s loss-making first half was a 1.4% write down to the value of its properties, which fell to £14.4bn. This was a prudent and necessary devaluation given the uncertainty over commercial rent demand in London following the EU Referendum.
It doesn’t necessarily mean that immediately following the Brexit vote significant amounts of office space went unrented or that commercial tenants shut their doors for a lack of shoppers. Indeed, the company’s revenue profit in H1 — what it collects from tenants etc — actually increased 4.5% year-on-year, to £192.5m.
However, it does, more worryingly, point to a negative outlook for the market as a whole. In fact, Land Securities’ management warned that the increased supply of new office space, higher vacancy rates, and uncertainty over EU access for the services sector have all led to a weakened negotiating position for property owners in general.
Likewise, the company did much to highlight its ability to survive a market downturn, drawing attention to its low 22.6% loan-to-value ratio and £1.46bn in cash and credit available for investing during the down cycle. These qualities are obviously great for Land Securities, but they do suggest that the company is bracing for a potential downturn.
In contrast to a somewhat gloomy commercial property market, the private housing market is looking relatively buoyant. The sector’s positive outlook was bolstered on Monday by the second half trading update from homebuilder Taylor Wimpey (LSE: TW).
Despite noting a very slight year-on-year downturn in sales and uptick in cancellations, the overall results were positive enough to send shares trading up 4% by closing time. The rally was led by news that the company had fully sold its 2016 target home completions and had already forward booked 23% of 2017’s allotment.
A highly cyclical sector
Does this good news from Taylor Wimpey cancel out the negative outlook from commercial property developers? Not exactly. Rather, it highlights the fact that a persistent lack of sufficient supply in the housing market combined with low interest rates and government support for buyers are propping up the sector.
Now, these imbalances work to the advantage of Taylor Wimpey and other homebuilders, but we shouldn’t forget that the sector remains a highly cyclical one. And stagnating prices and slowing demand growth suggest that we’re closer to the peak of the market than the trough.
That said, with full year operating margins expected to top 2015’s 20.3%, net cash of £360m and £450m in dividends due to be dispersed in 2017, I’ll be watching Taylor Wimpey shares closely during any downturn in case they reach bargain basement prices.