BRIGHT LIGHTS BIG CITY
As property investment niches go, you can’t get much more desirable than this central development, writes Joan Muller
London projects still offer an upside for South African investors
Back in 2010 when SA insurance tycoon Donald Gordon’s former Liberty International first split into London-focused Capital & Counties Properties (Capco) and Capital Shopping Centres (now Intu Properties), most fund managers favoured the latter. Many were sceptical of the demerger and whether Capco’s management would deliver on its promises to unlock value at Covent Garden, the once shabby precinct for shopping, restaurants and entertainment.
But Capco turned out to be the more lucrative rand hedge bet by far. Investors who held onto the central London development play have been richly rewarded with capital growth of close to 530% since its May 2010 listing (to July 10). Mall owner Intu showed a more pedestrian 65% rise over the same time. Capco owns a £3bn property portfolio in central London including various buildings in the Covent Garden precinct, Olympia exhibition centre, some West End offices and a 77 ha tract of land at the Earls Court exhibition centre which it plans to turn into a huge new residential-led precinct.
Granted, Intu pays a bigger dividend. The stock is currently trading at a yield of around 4% versus Capco’s meagre 0,3%. Still, Capco’s growth story has been phenomenal — despite the share price dropping around 20% between February and October last year.
It appears that 2014 weakness was merely a temporary lull amid uncertainty about how this year’s UK elections, held in May, would pan out. There was talk last year of the possible introduction of further taxes on higher-end residential properties, which negatively affected investor sentiment towards listed companies that had exposure to the UK’s housing market.
Capco plans to turn Earls Court, a stone’s throw away from sought-after Chelsea, into an entirely new district including about 8 000 apartments, parks and two high street shopping nodes.
With the election out of the way, it appears that market sentiment has improved. Capco’s share price is up 16% since early May and around 48% higher than the 18-month low of R56,45 hit in October last year.
The question arises whether SA investors who have not yet bought into the London and JSE-listed company have missed the boat. It seems not. Coronation Fund Managers property analyst Anton de Goede believes Capco is likely to offer further upside over the next three to five years as management starts to roll out its Earls Court development and continues to reposition Covent Garden.
In fact, development profits could be realised sooner than expected if potential partners in the Earls Court project are keen to acquire stakes in the development, says De Goede. The first residential phase of Earls Court (800 apartments at Lillie Square) is nearly sold out, underscoring the strong demand for housing in central London. De Goede says the second phase could potentially be launched in the second half of this year.
While management, under the helm of CEO Ian Hawksworth, has already made big strides in
Investors who held onto the central London development play have been richly rewarded with capital growth of close to 530%
repositioning Covent Garden as one of central London’s prime mixed-use precincts, the development continues to report healthy growth in sales and footfall figures.
Management is gaining exposure to sought-after streets surrounding Covent Garden, the most recent being a strategic move on to Bedford Street towards Leicester Square. There are also plans to add a new mixed-use development between Long Acre and King Street to Covent Garden over the next two years which would include a retail, residential and restaurant component. Capco recently also introduced a residential component to Covent Garden via office-to-apartment conversions, which are already setting a new benchmark for residential selling prices for the area.
Capco may appear expensive at first glance as it already trades at a sizeable premium to net asset value (NAV). But that is not necessarily cause for concern as other central London property developers also tend to trade above NAV at various points in the investment cycle.
Though Capco doesn’t offer SA investors the same level of diversification as some offshore property plays such as Redefine International, Rockcastle or MAS Real Estate, its niche exposure to the office, retail and residential markets of central London, arguably the most desirable real estate hub in the world, is unrivalled on the JSE.