It has not been the best of years for real-estate investment trusts (Reits), but there have been varying fortunes within the sector. Nearly all constituents were badly hit by the Brexit vote, but as the dust began to settle, two things became clear. The exit process will take years, and in the meantime there remains a restricted supply of new office space in London where most Reits operate, a situation that will become more acute as property companies wind down or delay their development plans.
Total office construction across London is at an eight-year high, with 14.8m sq ft under evelopment, but the underlying picture tells a different story. The construction period on a number of schemes has been extended, so that nearly 1m sq ft of space due for completion by the end of the third quarter of 2016 was still in progress at the end of it.
And, according to consultancy Deloitte’s crane survey, the 51 new office developments adding 4.8m sq ft identified in the summer 2016 survey had shrunk to 40 developments, adding 2.8m sq ft, by the winter report.
So the likes of British Land (BLND) and Land Securities (LAND) are effectively battening down the hatches, with new speculative development now strictly off the menu. Emphasis now will be on securing a revenue stream based on long-term leases, even if this means securing such a deal at lower rents.
And, while the referendum clearly dented sentiment, leasing volumes last year were down only 10 per cent on the five-year average. Significantly, 61 per cent of all pre-lettings were secured after the referendum, and included tech giant Apple (US:AAPL) at Battersea Power Station, as well as US bank Wells Fargo (US:WFC).
Some operators such as Segro (SGRO) have been little affected by the whole business, as demand for industrial warehouses has remained robust. The company has more than half a million sq ft of space under development, but over three-quarters of this has already been pre-let. West end landlord Shaftesbury (SHB) has also been left relatively unmarked by the referendum, with visitor numbers remaining strong in the key areas of Soho, Covent Garden and Chinatown.
Higher business rates are due to come in later this year, but tenants are expected to absorb these. Demand for space remains strong, which means that Shaftesbury can maintain rental growth.
| Price (p) | Market value (£m) | PE (x) | Yield (%) | 1-year change (%) | Last IC view | |
| Assura | 56 | 931 | 46.9 | 4.0 | 8.2 | Buy, 59.7p, 23 Nov 2016 |
| Big Yellow | 707 | 1,115 | 10 | 3.7 | -3.0 | Hold, 670p, 23 Nov 2016 |
| British Land | 618 | 6,364 | 15.9 | 4.7 | -13.2 | Hold, 586p, 17 Nov 2016 |
| Derwent London | 2,583 | 2,877 | 6.1 | 1.1 | -19.7 | Hold,, 2,731p, 12 Aug 2016 |
| Great Portland Estates | 636 | 2,187 | 45.4 | 2.0 | -15.1 | Sell, 618p, 17 Nov 2016 |
| Hammerson | 563 | 4,466 | 20.4 | 4.1 | -1.0 | Hold, 550p, 25 Jul 2016 |
| Hansteen | 111 | 828 | 5.2 | 4.8 | -0.3 | Buy, 116p, 23 Aug 2016 |
| Intu Properties | 282 | 3,821 | 18.9 | 4.9 | -2.1 | Sell, 299.7p, 29 Jul 2016 |
| Land Securities | 1,015 | 8,026 | 21.6 | 3.6 | -5.0 | Hold, 1,004p, 15 Nov 2016 |
| Londonmetric Property | 151 | 949 | 167.6 | 4.3 | -2.8 | Buy, 143.4p, 1 Dec 2016 |
| NewRiver Reit | 335 | 784 | 21.5 | 5.3 | -1.5 | Buy, 319p, 18 Nov 2016 |
| Redefine International | 40 | 716 | 19.8 | 8.1 | -16.6 | Hold, 42.63p, 27 Oct 2016 |
| Safestore Holdings | 350 | 729 | 17.7 | 3.3 | 4.9 | Buy, 360.7p, 13 Jan 2017 |
| Segro | 468 | 3,885 | 6.4 | 3.4 | 13.4 | Buy, 437.1p, 27 Jul 2016 |
| Shaftesbury | 905 | 2,525 | 25.4 | 1.4 | 5.2 | Buy, 904p, 29 Dec 2016 |
| Unite | 593 | 1,316 | 5.3 | 2.6 | -1.9 | Buy, 630p, 26 Jul 2016 |
| Workspace Group | 774 | 1,263 | 27 | 2.2 | -7.9 | Buy, 667.5p, 10 Nov 2016 |
Favourites: Life goes on, but the investment climate is likely to remain depressed by the EU exit negotiations. Companies that offer some element of immunity are Shaftesbury, Segro and LondonMetric Property (LMP), with the latter two benefiting from demand for ‘last mile’ warehouse space to accommodate the shift in consumer buying patterns.
Outsiders: Retail sites are likely to come under pressure from increased online penetration, and early footfall numbers in the post-Christmas period tend to bear this out. Some shopping malls will perform well enough, but with retail chains under pressure we see growth prospects as relatively limited at shopping mall landlord Intu (INTU).
