Real estate investment trust (REIT) Segro (LSE: SGRO) has released an encouraging update which shows that it’s performing well. It expects adjusted earnings for the year to 31 December 2016 to be at the upper end of analysts’ forecasts thanks to strong operational performance and favourable trading conditions. However, looking ahead, could the issues posed by Brexit hurt its performance, as well as the rest of the UK property market?
Improving performance
The independent valuation of Segro’s assets at 31 December 2016 showed a like-for-like (LFL) increase in the value of its portfolio of 4.8%. While this was slightly lower in the second half of the year at 3%, it’s nevertheless highly encouraging given the risks posed by Brexit. Strong rental value growth was present in the UK, supported by modest yield compression. There were also development gains in the UK, while an uplift in the value of a former industrial estate in Park Roya,l which Segro has conditionally agreed to sell, also boosted its performance.
Strong leasing activity and LFL rental growth in Britain also contributed to impressive operational performance. There was progress in the development pipeline, with 19 of the 27 development projects in the active programme as at 30 June 2016 having been completed. The current pipeline remains upbeat and has the potential to deliver further profit growth in future.
Brexit challenges
Of course, all of the above has taken place at a time when Brexit isn’t in full flow. Negotiations between the UK and EU haven’t yet started, but when they do, the UK property market could experience a more difficult period. Two years may be insufficient to successfully negotiate an amicable divorce, so it would be unsurprising for the discussion period to end without a trade agreement being in place. That’s especially likely because neither side seems willing to back down on the two key issues of freedom of movement and access to the single market.
Therefore, the outlook for Segro and the wider UK property market could be challenging. Since the company trades on a price to earnings (P/E) ratio of 22.7, it lacks a wide margin of safety ahead of what could be a difficult period for the wider industry. Therefore, it may be prudent for investors to instead focus on better value opportunities within the UK property space.
For example, house-builder Persimmon (LSE: PSN) trades on a P/E ratio of 9.9. This means that if Brexit causes a slowdown in house prices in 2017, its shares may not be hit as hard as those of its higher rated sector peers. Furthermore, Persimmon is expected to deliver modest growth in each of the next two financial years. With it having improved its financial standing since the last housing crisis, now could be a good time to buy it for the long term.