Great Portland has top West End property and firepower to grab any Brexit bargains
The real estate trust has a portfolio of prime properties and the financial flexibility to snap up cheap assets, says Robert Stephens
ACCORDING to property investing folklore, the three most important factors when it comes to turning a profit on bricks and mortar are location, location and location. Great Portland Estates’ devotion to the London property market, and particularly the West End, suggests there may be some truth in the old saying.
Great Portland, a real estate investment trust, is unapologetically London-focused. Around 70pc of its £2.8bn portfolio is in the West End, with the remainder spread across the City, Southwark and other parts of the capital.
The potential for long-term growth in London’s commercial property market remains high. By 2030 its population is forecast to have risen by 14pc to 10 million. This is expected to drive an increase in inner London office-based jobs of
140,500 over the next five years. Over the same period London’s economic growth is expected to outpace the rest of Britain, with an annual rate of 2.3pc currently forecast. Growth in the West End could be boosted by the opening of Crossrail, which will increase London’s rail capacity by 10pc. About 200million passengers a year will use the new line. Since all of Great Portland’s committed schemes sit within reach of Crossrail, it is likely to be a major beneficiary of the line’s opening, due next year.
Brexit has contributed to a lack of direction in London’s property markets in the past year. Further economic and political uncertainty could cause this trend to continue. Valuations across Great Portland’s portfolio, however, rose by 2.9pc in the 2018 financial year.
The company seeks to manage its portfolio actively in an attempt to capitalise on property market cycles and over the past five years it has been a net seller in every year. Its strict set of acquisition criteria has meant that it has been unable to unearth a large number of properties with opportunities for it to add value.
Should Brexit cause commercial property prices to fall, its low borrowing figure of 12pc of the values of its properties could provide it with financial flexibility to capitalise on assets that become available cheaply.
Its business model entails a “repositioning” phase following the acquisition of a property. This involves lease restructuring, refurbishment or redevelopment. The goal is to maintain a satisfied occupier base (its current
satisfaction rating is 88pc). High occupier retention not only helps to reduce void periods but can provide sustainable long-term rental growth.
A focus on meeting the evolving needs of its occupiers means that Great Portland could successfully adapt to the changing face of London’s economy. As businesses seek greener buildings with greater innovations that incorporate the latest technology, the trust could have a competitive advantage over its rivals. Combined with stricter planning laws in the West End, where 70pc of buildings are in a conservation area, this could lead to higher demand for its properties. Even though the British economy is experiencing a period of slower growth, demand for prime commercial property remains high. In the 2018 financial year the company was able to secure 34 rent reviews with an average increase of 29.6pc. It also delivered 68 new lettings, with annual rent of £31.1m being 2.6pc above the estimated rental value.
The trust’s yield of 1.7pc is unlikely to interest income seekers. Special dividends and capital returns could be ahead, depending on market conditions, but they may be offset in the long run by capital raisings should acquisition opportunities arise.
A price-to-book ratio of 0.79, however, suggests that the shares trade at a discount to their intrinsic value. This margin of safety could provide a degree of protection against Brexit-induced uncertainty, as well as the potential for significant capital appreciation in future years.
While the trust is undoubtedly successful in using the property cycle to its advantage, its real appeal lies in its focus on the West End. Historically this area has been affected to a lesser degree by recessions and periods of decline in the property market than elsewhere in the country. In the long term the area could offer greater capital growth potential than the rest of Britain. The old cliché about location, it seems, still rings true today.
Questor says: buy
Share price at close: 665.1p