The UK property market faces an uncertain future thanks to the potential impact of Brexit. In the near term, property valuations could come under pressure and growth in demand for commercial property could slow as the wider economy endures a potentially challenging period. However, within the property sector there remain good value opportunities for long term investors. Here’s a prime example of a company which could rise by 25%-plus.
A positive update
Today’s trading update from commercial property specialist Tritax Big Box (LSE: BBOX) shows that the company has significant future growth potential. During the course of 2016, it made progress with 10 new investments which totalled a purchase price of £524m. It also exchanged contracts on 23 December for two forward funded developments which totalled £102m. They are both pre-let, conditional on planning consent, which is expected to be received in March. They should enhance the company’s portfolio value yet further and show that demand for commercial property within the logistics space remains high.
In fact, Tritax Big Box’s portfolio is 100% let, with all leases providing for upward-only rent reviews. This provides a degree of certainty in its long-term outlook, with a diverse mix of tenants (61% are in the FTSE 100 or FTSE 250) also reducing the company’s risk profile. Furthermore, the business has a strong pipeline of attractively priced investment opportunities which could enhance its portfolio over the coming year.
Upside potential
Tritax Big Box’s share price could rise by 25% or more, since commercial property companies remain relatively good value for money. For example, it trades on a price-to-book (P/B) ratio of around 1.5, which indicates an upward re-rating of 25% would still leave it offering good value for money.
In addition, a dividend yield of 4.6% indicates 25%-plus upside at a time when the FTSE 100 has a yield of around 3.7%. If Tritax Big Box’s share price increased by 25%, it would still have a yield which is in line with the wider index. And since rising demand for logistics space means that an additional 18m sq ft could be needed each year, the current increase in supply of 3.5m sq ft per annum means that rents could rise significantly.
Similarly, commercial property peer Land Securities (LSE: LAND) also has a bright future. While the UK economy faces a degree of uncertainty in the short run, in the long term the lack of supply versus rising demand could push rents higher.
Of course, in the next two years Land Securities is expected to record a rising bottom line, with earnings forecast to rise by 4% next year and 7% the year after. This could improve investor sentiment and with the company trading on a P/B ratio of just 0.67, its shares could rise by 50% and still trade at only net asset value. Therefore, while Tritax Big Box could be a sound buy, Land Securities has a wider margin of safety and more upside potential over the medium term.