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

The Daily Telegraph - Business - - Business -

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

Ticker: GPOR

Share price at close: 665.1p

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