The regional commercial property market outside London has plenty of catching up to do as valuations are only now starting to edge off record lows. Centred in Birmingham, Real Estate Investors (RLE) is ideally situated to take advantage of this, as the boom conditions in the South-East start to percolate out into the provinces. And trading on a 24 per cent discount to 2015 forecast book value, the company is the cheapest in the entire real estate sector.
- Big discount to book value
- Rental growth starting to build
- Exposure to emerging Midlands revival
- Cash pile for further investments
- Debt servicing costs above average
- High loan-to-value ratio
The business model is simple enough. The company buys high yielding – that's to say cheap – assets with a view to adding value through initiatives such as refurbishment and leasing up of voids. Achieving this in an area badly affected by the closure of many key industrial entities has been difficult. However, prospects are now improving at the same time as 'distressed disposals', which REI's experienced management team has been keen to take advantage of, are finally starting to gather momentum. REI can afford to be picky, and is concentrating on buying properties with short-term leases that will require refurbishment before re-letting. And there is plenty of room to grow the rental stream, with average occupancy levels at 83.6 per cent.
The many jibes about Birmingham and the surrounding area have served to mask what is really happening. Car production is one notable sector that is making a welcome return, and that has helped to attract to the West Midlands the highest level of overseas investment in the UK, outside London. The positive effects can already be seen in the Birmingham office sector (just over a third of the portfolio). Tightening supply and diminishing lease incentives are precursors of a return to growth in headline rents. And the take up of office space in Birmingham last year was up by a third from the previous year, and rising capital values were reflected by a fall in prime office yields from 6.25 per cent to 5.75 per cent.
| REAL ESTATE INVESTORS (RLE) | ||||
|---|---|---|---|---|
| ORD PRICE: | 50p | MARKET VALUE: | £56m | |
| TOUCH: | 48-51p | 12-MONTH HIGH: | 52p | LOW: 43p |
| FWD DIVIDEND YIELD: | 4.8% | TRADING STOCK: | nil | |
| DISCOUNT TO FORWARD NAV: | 24% | |||
| INVEST PROPERTIES: | £69.6m: | NET DEBT: | 85% | |
| Year to 31 Dec | Net asset value (p) | Pre-tax profit (£m)** | Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2011 | 54.7 | -0.9 | 0.1 | nil |
| 2012 | 56.1 | 1.3 | 0.8 | 0.5 |
| 2013 | 59.1 | 0.6 | 0.4 | 1 |
| 2014* | 59.5 | 1.6 | 1.6 | 1.5 |
| 2015* | 65.8 | 3.2 | 2.9 | 2.4 |
| % change | +11 | +100 | +81 | +60 |
NMS:3,000 Market makers:5 BETA:0.10 *Liberum forecasts **Adjusted pre-tax profits | ||||
REI has a useful network that allows it to acquire assets off market, avoiding competitive bidding. To finance acquisitions, the company had cash and undrawn facilities of £8.5m at the end of 2013, to which it added a further £20m through a placing in April this year. Typical of the deals last year was the £4.8m acquisition of Southgate Retail Park in Derby for a net initial yield of 10 per cent. Planning consent was secured for a food store, and part of the site was sold to Lidl for £4.25m. The remainder was retained, and this is let or under offer with an estimated rental value of £250,000 a year.
The high property yields on offer means earnings are expected to rise fast taking the dividend along, too - the payout doubled last year. What's more, as property values lift, the rental income stream builds and the asset management programme matures, the company expects to dispose of some of its assets. The resulting cash pile will also be more efficiently distributed to shareholders as the company intends to convert to a real estate investment trust (Reit) sometime next year.
