Property manager and developer Capital & Counties (LSE: CAPC) has released an upbeat trading update which shows that it is performing well despite an uncertain environment. This could lead investors to believe that UK property has excellent defensive characteristics, since it continues to deliver strong returns even in unfavourable circumstances. However, this may not necessarily be the case.
Capital & Counties has delivered positive leasing activity at its Covent Garden estate. It remains on course to achieve its estimated rental value (ERV) target of £100m by December 2017. As such, Capital & Counties appears to be weathering the economic and political storms of 2016, with the company seemingly taking an uncertain London property market in its stride. For example, it has introduced new brands, set new rental tones and seen the successful transformation of the Royal Opera House Arcade.
A degree of uncertainty
Similarly, Capital & Counties’ Earls Court estate has also performed as expected. It continues to de-risk the land holdings and has completed the first phase of demolition of the former Earls Court Exhibition Centres to ground level. Capital & Counties expects to welcome its first residents of Phase 1 of the Lillie Square project by the end of the year. Its strong financial position and conservative loan to value (LTV) ratio of 20% indicate that further progress could lie ahead.
However, Capital & Counties faces a tougher 2017 than 2016. Although Brexit has created a degree of uncertainty this year, the reality is that it has not yet begun. There is an increasing chance of political challenges for the government, both with Parliament and the EU, as it seeks to invoke Article 50 of The Lisbon Treaty. This could drag out the process of Brexit and lead to more investors, businesses and individuals seeking to put off investment in London in particular over the course of 2017.
A shrewd move
Despite this, investing in UK property could still be worthwhile. Clearly, the near term outlook for the sector is highly challenging and paper losses could be on the cards for investors in the industry. However, in the long run the likelihood is that demand for property in the south east will continue to increase as population growth and the prospect of a strong UK economy combine to create more favourable operating conditions.
Buying property stocks such as Capital & Counties and Berkeley (LSE: BKG) could be a shrewd move. Capital & Counties has a price-to-book (P/B) ratio of only 0.68, which indicates that it has a sufficiently wide margin of safety to merit investment. Meanwhile, Berkeley trades on a price-to-earnings (P/E) ratio of 6.2 and could benefit from higher foreign investment in UK property as a result of sterling’s weakness. I believe that it has significant upward re-rating potential, and while Berkeley’s profit is due to flat line in 2017, it continues to have a bright long term future.
While UK property is unlikely to soar in 2017, now could be a good time buy cheap stocks such as Berkeley and Capital & Counties ahead of strong long term performance.