Second bid for INTU may stoke fresh interest in beaten down property stocks

Russ Mould
4 October 2018

“Property stocks have not really recovered from the collapse of the Klepierre-Hammerson-INTU love triangle in the Spring with the result that many of them – and especially those exposed to retail, major developments or City offices – have seen their share prices tumble and trade at an even deeper discount to their stated net asset value,” says Russ Mould, AJ Bell Investment Director. “It will therefore be interesting to see if a second bid for INTU, led this time by major shareholder Peel Group and a consortium that involves Brookfield and Saudi Arabia’s Olyan, is successful and – if so – whether this persuades investors to dive back into to the downtrodden sector.”

 
Source: Thomson Reuters Datastream

“The collapse of Hammerson’s bid for INTU and a bid for Hammerson itself from France’s Klepierre had removed one potential catalyst for a potential return to favour by property stocks, as fears over Brexit, tough trading in the restaurant sector and even tougher times form bricks and mortar shops took over.

“As a result, the Real Estate Investment Trusts was, as of the close on Thursday, down 7% for the year and Real Estate Investments and Services down nearly 11%, compared to a 3% fall in the FTSE All-Share. That left them ranked 27th and 32nd out of the 39 industrial groupings which make up the All-Share benchmark.

“That turgid showing, and the summer slump in share prices, leaves several REITs’ shares trading at big discounts to the book value of their assets as investors priced in future decreases in the capital value of their properties and possible decreases in rental income for good measure.

 

Share price (p)

Historic NAV (p)

Premium / (discount)

Safestore

504.0

357.0

41.2%

Big Yellow

897.3

665.0

34.9%

SEGRO

618.2

556.0

11.2%

Londonmetric Property

178.4

165.2

8.0%

TRITAX Big Box

146.1

146.2

 (0.1%)

A & J Mucklow

545.0

559.0

 (2.5%)

Hansteen

95.7

100.0

 (4.3%)

Workspace

947.5

1,037.0

 (8.6%)

Shaftesbury

892.5

983.0

 (9.2%)

Newriver

251.5

292.0

 (13.9%)

St. Modwen

374.9

474.4

 (21.0%)

Great Portland Estates

664.1

845.0

 (21.4%)

Capital & Counties

253.8

334.0

 (24.0%)

Derwent London

2,795.5

3,713.0

 (24.7%)

CLS

219.8

294.7

 (25.4%)

Town Centre Securities

267.0

384.0

 (30.5%)

Land Securities

863.9

1,403.0

 (38.4%)

British Land

588.4

967.0

 (39.2%)

Hammerson

443.8

790.0

 (43.8%)

INTU

185.2

411.0

 (55.0%)

Source: Company accounts (based on historic NAV per share), Thomson Reuters Datastream

“The question that investors must address now is to what extent is the potential for drops in rental income, increases in vacancies and a drop in property values already priced in?

“Some of these discounts to NAV do look particularly big so it is no surprise that someone has been tempted to have a look, especially as sterling is weak (making British assets look even cheaper to overseas buyers) and the US real estate sector has already seen bid activity start to gather as property firms’ shares have weakened.

“Brookfield, listed on the Toronto Stock Exchange, has already swooped for New York-based Forest City in an $11.4 billion deal this year, while France’s Unibail-Rodamco launched a bid for Westfield in late 2017.

“In a world where interest rates and bond yields are still low – although they are now finally rising – many investors will still be left looking for dependable income streams and rent from property may be one way of getting it. As such some may be tempted to look at property stocks as both an income and value play, bearing in mind Mark Twain’s old maxim: ‘Buy land, they aren’t making it any more.’

“Within the realm of British property firms there is still a clear valuation gap between sub-sectors. 

“Distribution, logistics and warehouses – all related to the rise of online shopping, click-and-collect and almost-instant customer fufilment trade at or even above net asset value, as do self-storage plays, as investors price in future capital appreciation for their land and rent increases.

“By contrast, the more exposure a REIT has to retail, the City, London more generally and also to new developments, the lower the valuation relative to net asset value and the wider the discount appears to become.

“Whether they prove to be fabulous value plays or wicked value traps remains to be seen but Peel and Brookfield are putting their money down in the view that INTU is oversold and cheap. 

“It will be interesting to see if anyone else follows their lead by looking at other firms in the sector.

“Consolidation among the UK real estate investment trusts (REITs) would cut out a lot of costs and several management teams are not needed where frankly one would do. 

“Capital & Counties plan to break itself up could flush out a bidder for both halves of the firm and even a deal involving one of the real giants, such as Land Securities or British Land, cannot be ruled out entirely, especially as investor scepticism toward the sector again means the prevailing valuations may prove tempting for someone.”

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