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FTSE 350: Property development still buzzing

Shares in many developers flat-lined last year as investors anticipated a change in market conditions, but in most cases that presents a buying opportunity
January 29, 2015

Commercial property developers went from strength to strength last year, and there's every indication that further growth in both rental income and capital values can be expected in the coming year. St Modwen Properties (SMP) looks particularly well placed, with a lot of value in its development pipeline yet to be unlocked. Perhaps the jewel in its crown is the New Covent Garden Market site near Vauxhall, South London, which is expected to secure unconditional planning consent in the first half of this year. Its transformation from a work in progress to a fully fledged asset will significantly enhance St Modwen's book value.

CLS Holdings (CLI), which boasts the best long-term track record of all UK property companies, also has residential-led development plans in the Vauxhall and Nine Elms area. With the new US and Dutch embassies well under construction and, futher south, the Battersea Power Station reconstruction project well underway, the area will be unrecognisable in a few years' time.

Residential estate agency businesses were buffeted by a number of headwinds last year, but many of these have since died down. Worries about an early rise in mortgage rates were kicked into touch as consumer price inflation ended the year at its lowest level for 15 years, while concerns over a mansion tax - which would hit Savills (SVS) in particular - were largely assuaged by changes to stamp duty that significantly increase tax on the top end of the housing market.

Sentiment is likely to remain fragile in the run up to the general election, and all estate agents are suffering from a chronic lack of stock, particularly in London - Foxtons (FOXT) fell out of the FTSE 250 in December. Yet the bigger players are well diversified: Savills should be buttressed by its strong commercial and overseas operations, while Countrywide (CWD) has a thriving rental business.

Residential landlord Grainger (GRI) is also well placed, with plenty of 'reversionary' potential on its balance sheet yet to be crystallised. This is because a majority of its tenanted homes are subject to - and valued as - regulated tenancies, whereby landlords have no right to eject tenants paying a sub-market rate. When the tenant dies, the full market value of the property can be realised.

One area less likely to be affected by pre-election jitters is student accommodation, with student numbers exceeding 500,000 for the first time this year. Figures from market leader Unite Group (UTG) bear testimony to this; its 130 purpose-built accommodation units cater for 43,000 student, and occupancy rates are currently running at 99 per cent. Unite thinks it can double net earnings between 2014 and 2018.

Company nameShare price (p)Market value (£m)PE ratioDividend yield (%)1-year performance (%)Last IC view
Capital & Counties3773,148268.90.42.8Buy, 322p 4 Aug 2014
CLS Holdings1,4406186.10.09.3Buy, 1,335p 13 Aug 2014
Daejan Holdings5,6859275.01.417.3Not covered
Grainger18978710.41.3-14.8Buy, 196p 21 Nov 2014
St Modwen Props.41090810.91.05.0Buy, 394p 9 Jan 2015
Unite Group4971,00210.71.119.0Buy, 434p 13 Nov 2014
Countrywide43193213.62.6-28.1Buy, 446p 18 Dec 2014
Savills72798016.02.710.1Buy, 595p 8 Aug 2014

Favourites

Much of the growth potential for property companies is locked up in development projects, which are always at risk from a change in market circumstances. That's why shares in many developers took a breather last year, and now trade at discounts to forecast book value. Investors would do well to buy St Modwen's stock at these levels, for example. Unite is another strong performer in a solid niche market, yet its shares are only trading at around forecast book value.

Outsiders

Shares in Countrywide fell by around a third last year. We still think the longer-term outlook is strong, because the fundamentals supporting the housing market are likely to remain in place. In the short term, however, activity in the secondary housing sector may be held back as potential buyers and sellers sit on their hands until the election in May is out of the way.