Property stocks in UK promising?

CAUTION ADVISABLE: MARKET WATCHERS SPOT CHEAP ENTRY POINT IN UK REAL ESTATE INVESTMENTS

The office and retail sectors are the most vulnerable to a hard Brexit scenario.

It’s been over a year since the Brexit vote, which unleashed a massive selloff on the JSE and placed UK-focused real estate investment trusts (Reits) on the loser’s pile.

The share prices of some JSE-listed UK Reits have recovered 5 to 15% so far this year and their total returns are now in the green, partly helped by the 17.29% gain in the rand to the pound since the June 23, 2016 vote.

Most UK Reits on the JSE are trading at discounts to their historic net asset value (NAV) of 3-45%, while SA-focused Reits are still fetching premiums.

But now is a good time for SA investors to increase their exposure to the UK real estate market via the JSE? It has nine property companies that are solely focused on the UK or have a large part of their investments there: Capital & Counties Properties, Hammerson, Atlantic Leaf Properties, New Frontier, Capital & Regional, Intu Properties, Tradehold, Stenprop and Redefine International.

Schroder Investment Management’s Tom Walker said the UK’s outlook is still uncertain. Share prices might continue to be volatile leading up to the actual EU exit and what happens to the UK’s economy in three to five years.

Walker said investors must look beyond the discounts to NAV when judging Reits’ investment case. “The world has changed and Brexit is changing things. Where the NAV is today is anyone’s guess.”

Stanlib believes property stocks offer good value at current levels. “We believe that the stocks have priced in most of the Brexit uncertainty,” said Stanlib’s Keillen Ndlovu.

Initial fears were that corporates would move their operations out of London to EU regions, leading to high vacancies and limited rental growth for property companies. Ndlovu said this hasn’t been the case. “Most UK property companies are experiencing record leasing activity and there’s still a lot of cash chasing London assets.”

Investors hitching their wagons onto the UK real estate market must be sector specific, said Tiffany Jones at Catalyst Fund Managers. She believes that fundamentals in the industrial sector are probably the best, specifically for well-located logistics and distribution properties that can serve London in the wake of growing e-commerce. Anchor Stockbrokers’ Craig Smith agrees, saying the industrial sector is holding up fairly well, benefitting from e-commerce and its demand for logistics space. “This is supported by the fact that the discounts for industrial-focused Reits are much tighter than discounts for office and retail-focused Reits.”

JSE-listed counters that stand to benefit from the positive outlook for the UK’s industrial sector include Stenprop, Equites Property Fund and Stor-Age.

There are concerns about London being oversupplied with office space which, with muted financial services sector demand, might impact office rental growth. A weaker pound might put pressure on retailers’ margins as the majority already import goods, which will raise input costs.

Some JSE-listed UK Reits have recovered