Regular reader of this column Richard Barrand raises the valid point that commercial property developers such as British Land (BLND), Great Portland (GPOR), Hammerson (HMSO) and Land Securities (LAND) tend to have low price/earnings ratios despite being good dividend payers. Commercial property values have not fallen, so why have the shares?
British Land, for example, tumbled from 876p in October to a low of 664p last month, Land Securities from 1352p to 965p and Great Portland from 889p to 684p while Hammerson slid from 703p last May to 535p.
This is in sharp contrast to housebuilders, whose shares have soared in the economic recovery since 2009 to the point where they are, if anything, overvalued.
Various theories exist for the poor recent performance of commercial property stocks. One is that these capital-intensive companies may get caught up in Chancellor George Osborne’s plans to limit the tax relief that can be claimed on interest payments as he tackles tax dodging.
This would be an argument for avoiding the more overgeared plays but I do not feel it is a genuine cause for alarm in the sector, which is generally not overstretched financially.
Another bete noir is that Brexit, or at least the uncertainty leading up to the EU referendum, will hold back businesses and thus depress rentals. Property companies such as British Land that have a heavy presence in the South East would be most vulnerable, according to this argument. Again, I think the fears are overdone and life will go on whatever happens. There is no evidence yet of rentals slipping.
Commercial property companies have picked up in the past three or four weeks, suggesting that the falls were overdone. A buying opportunity still exists for anyone tempted to invest in this sector.
The problem is that these companies can be very hard to value because they make money from renting space in their developments as well as from selling the office and shopping blocks themselves. Thus you have a fairly steady stream of income on the one hand and lumpy slabs of non-recurring profit on the other. Selling a development produces a large profit now but reduces potential rental income for years to come.
In these circumstances the p/e ratio becomes an inaccurate, even meaningless guide. You need more gut instinct in judging commercial property companies than with other shares. If in doubt, stay out as I do. If you have a feel for this sector, though, there is plenty of value in it.
If any other readers want to raise investment issues, please email me on rodhobson@hotmail.com.
Budget Speech Confused by Electioneering
Chancellor George Osborne produced a small surge in the FTSE indices when he presented his latest Budget but as an investor I could not see any reason to get excited, apart from agreeing with those who rushed to get out of soft drinks manufacturers, and even that reaction was probably overdone.
There are two problems with Osborne’s Budgets. One is that he has taken Gordon Brown’s ploy of introducing measures in advance of their implementation to an extreme, ditto the leaking of proposals. This makes keeping track of what is happening rather problematic, as there is always scope to tweak or scrap measures in the meantime.
More confusing is that the Budget speech is increasingly about Osborne’s electioneering. Thus the latest offering is littered with announcements that should more properly come from the relevant ministers. He has turned his big day into a dog’s dinner.
Investors should, on the whole, take no notice and carry on investing. If you have not used up your ISA allowance for the current financial year, get on with it. By the time you have waded through all the Budget documents it will be too late.
