It was not so long ago that investing in property was seen by many as a logical and smart move. However, fast forward to today and things look very different. Demand for commercial property has dropped, amid uncertainty caused by the Brexit vote last June. And, looking forward, uncertainty does not seem to be going anywhere as the risk of protracted exit negotiations with the European Union is likely to weigh on business confidence and consumer spending.
We aren’t exactly sure how things will shake out just yet, but many office and retail focused REITs have been heavily sold off and now trade at steep discounts to their net asset values (NAV). It’s clear that markets don’t like uncertainty — but uncertainty can also create opportunities.
Rental rates going strong
Right now, British Land (LSE: BLND) trades at a discount to NAV of 34.6%, its widest level since July 2016. This seems understandable as investors remain mindful of the potential headwinds going forward, but rental rates have so far been going very well for British Land.
Despite slowing retail sales growth in the UK in recent months, British Land’s high quality assets seem to have held up better than most, with recent retail figures showing its properties have been outperforming industry benchmarks. In the three months to the end of December, the company secured 314,000 sq ft of retail lettings and renewals at 8.7% ahead of its estimated rental value (ERV).
However, there are also signs of weakness. Its third quarter occupancy rates dipped 1 percentage point to 97%, amid softening demand for London office space. And although retail rental rates were ahead of expectations, office lettings and renewals were only in-line with their ERV.
Still, British Land is in much better shape than it was leading up to the recent recession. With less leverage and a stronger focus on higher value property assets, its earnings should be less volatile and its dividends more stable.
British Land’s current loan-to-value ratio of 30.5% compares favourably to its 2008 figure of 47%. In addition, the REIT’s speculative development commitments stands at just 5% of its portfolio value right now, a far cry from the 23% figure in 2008.
With this in mind, I’m confident that the company has the ability to withstand the current uncertain economic climate.
More highly levered
intu Properties (LSE: INTU) trades at a slightly smaller discount to NAV of 33.6%. The shopping centre REIT, like British Land, could see rental yields fall if the economy weakens and consumers spend less on retail.
With a net debt-to-assets ratio of 44%, intu is more highly levered than many of its peers. But it isn’t excessive relative to its rental income, given that interest cover is just below 2.0x. What’s more, it shouldn’t prevent the firm to pursue further acquisition and development opportunities, and that should enable the company to deliver continued earnings growth going forward.
intu’s dividend is likely to remain unchanged at 13.7 pence per share this year, but that still leaves intu with a higher yield than British Land. For 2017, intu’s prospective dividend yield is 5.1%, which just about beats British Land’s prospective yield of 5.0%.