Is it the right time to invest in Capital & Counties?

OUTH African investors have always had the option of investing directly in UK property without having to utilise offshore allowance through Intu, a leading shopping centre owner and operator, as well as Capital & Counties, a property developer.

Since the Brexit referendum vote, Intu has declined by about 11 percent to the end of last month while Capital & Counties has seen an even sharper decline of 26 percent in rand terms.

A large proportion of the share price declines can be attributed to the devaluation of the British pound relative to the rand of about 10 percent over the same period.

Given this decline, the ques- tion often asked is: “Is it the right time to buy Capital & Counties?”

Central to answering the question is understanding the entity and drivers, as well as inherent risk scenarios and of course opportunities.

Capital & Counties offers investors exposure to UK prime retail assets such as Covent Garden, which accounts for about 58 percent of the value of the assets on the balance sheet.

This unique retail asset has been repositioned and redeveloped to drive up rentals by attracting various premium and unique retail, including food offerings. Management has successfully executed on this strategy and is on track to achieve £100 million (R1.7 billion) rental income on the property by the end of December next year. By June this year, 50 new leases and renewals were signed at 7 percent above the December 2015 estimated rental levels.

The company has committed 72m (R1.07bn) on redevelopment projects in the precinct to further enhance value.

Although the bulk of redevelopments to enhance rentals has been done, average rentals at Covent Garden are still lower than central prime London rentals.

This leaves more room for rental increases although the current economic conditions are likely to pose challenges. These income-generating retail assets should be able to withstand the current environment given their unique quality. Residential assets Investors in Capital & Counties also gain exposure to the socalled Earls’ Court master plan, which is a residential development opportunity comprising about 70 acres of land located in Central London with good access to transport. This portion of the fund will be the largest driver of growth in net asset value in the medium to long term due a shortage of housing in London.

The development aims to provide about 10 000 residential units, but the challenge is absorption by the market of the units to be supplied. London house prices have increased by about 49 percent since the first quarter of 2013 to the last quarter of last year, as the market attracted a lot of foreign buyers especially at the high end, with a large proportion of the purchases increasingly being made for investment or rental purposes.

The recent transfer duty increases as well as uncertainties surrounding the Brexit vote have, however, led to a slowdown in the number of sales transactions and previously achieved selling prices for the residential units are coming under the spot- light as they are likely to come under pressure. In the recently reported results, the value of Earl’s Court has in fact been reduced by 14 percent with the overall property values declining by 3.8 percent on a like-for-like basis reflecting the uncertainty.

Gearing levels within Capital & Counties remain conservatively low at about 20 percent. Further write downs in asset values are, therefore, unlikely to lead to a breach in debt covenants. Low funding costs as well as potential fiscal stimulus are likely to support asset values.

The long-term investment case for Capital & Counties remains intact and hinges around its unique quality retail portfolio which should prove defensive and continue to achieve good rental growth.

Capital & Counties offers investors exposure to UK prime retail assets such as Covent Garden.