Five attractive property stocks
Investors remain wary of Reits, but many offer solid yields with inflation protection, says Max King
Despite widespread pessimism about the property sector during the earlier stages of the pandemic, there has been nothing but good news in the last year. The average house price has reached £274,000, up nearly 10% year on year, according to the UK House Price Index compiled by the Office for National Statistics, amid “an unprecedented lack of supply”. The number of completed new dwellings remains consistently above 200,000 after ten years of lower output following the financial crisis.
Lockdown closed restaurants, coffee shops and pubs and shifted shopping online, leading to many empty properties on the high street, but the premises have been filled by new tenants. Only the former department stores are struggling to find new purposes. A focus on streamlining supply chains means that the boom in logistics and warehouse property continues.
Workers have returned to the office, with working from home confined to one or two days a week. Office vacancy rates in central London are close to the long-term average and there is almost a construction boom under way. Real-estate services firm Jones Lang LaSalle expects growth in prime rents in the year and a contraction in rent-free periods. In March, it reported £6.6bn under offer and £2.2bn traded in the year to date, including the £718m purchase of the Scalpel building on Lime Street by a Singaporean buyer on a net income yield of under 4%.
Reasons to be cautious
But investors remain wary of real estate investment trusts (Reits) and property stocks. Share prices have moved little, if at all, in the last year. Those of Land Securities and British Land, who focus on office and retail, trade on 20% discounts to net asset value (NAV). Even warehouse and logistics specialist Segro, the darling of the sector, is unchanged over six months, so its premium to estimated NAV has fallen. TR Property (TRY), the £1.5bn trust investing in pan-European property shares, is down 10% since the summer and trades on an unusually high discount of 9%.
Investors are probably right. Interest rates are rising and there is complacency about the consequences. At present, they are heading for what would universally be described as sensible levels, but rates usually go on rising till they cause pain on the principle that “if it’s not hurting, it’s not working”. The consequence is, if not recession, then a significant economic slowdown, job losses and reduced demand for nearly all property.
In addition, long-term interest rates, the basis for fixed-rate borrowing, are rising. The US tenyear Treasury yield recently reached 2.5% and will probably go higher. UK gilt yields are 0.7% lower, but could catch up – or overtake – US yields. In the US, the standard 30-year borrowing rate for mortgages has risen above 4.5%, heralding at least a slowdown in the market. House prices there and in the UK are unlikely to fall, but buyers can probably afford to be more careful about prices and more patient.
In the stockmarket, a considerable amount of bad news is discounted, but investors will probably wait until there is light at the end of the tunnel before pushing prices higher. In the meantime, John Cahill at brokers Stifel points to some very attractive funds with good, inflation-protected yields based on properties let on strong covenants for the long term. These shares trade at minimal, if any, discounts to net asset value, but future valuation gains are almost guaranteed.
Strong growth and inflation protection
Top of his list is Secure Income (LSE: SIR), yielding 3.8% on expected dividends in 2022. Nearly 90% of its income comes via an almost equal split between Merlin Entertainments (including Alton Towers and the Manchester Arena), Ramsay Healthcare (11 private hospitals) and 123 Travelodge hotels. The average unexpired lease term is 30 years and most of the leases are directly linked to inflation.
Tritax Big Box (LSE: BBOX), which “owns, manages and develops prime logistics real estate in the UK”, has been a star performer in recent years, so its 2022 yield is below 3%. However, the market is still undersupplied, which implies strong growth and inflation protection in a portfolio with an average unexpired lease term of nearly 15 years.
The shares of Primary Health Properties (LSE: PHP) have been surprisingly dull in the last six months as a whole, despite a recent rally. The result is a 4.3% yield on a dividend that has been increased for 26 consecutive years. The unexpired lease term on its properties is around 11 years, but these are doctors’ surgeries and health centres with rents paid by the NHS. Lease renewals are highly likely and rent increases, mostly linked to inflation, are guaranteed. Assura (LSE: AGR) is its equally attractive and similarly valued rival.
Lastly, Supermarket Income (LSE: SUPR) has been another success story with strong returns since its flotation nearly five years ago. As the name implies, it owns and rents supermarkets to food retailers, whose business remains resilient. The shares yield nearly 5%, the average unexpired lease term is 15 years and both rent and dividend increases are built into the business model. Nervous investors will sleep easily owning all these funds.
“Office vacancies in central London are close to the long-term average”