The one thing that the FTSE 350's real-estate investment trusts had in common last year was the benefits of rising rental income and an increase in the value of properties in general. It is difficult not to expect much of the same in the coming year, although it's likely that yield compression will start to moderate while rental income should grow.
When it comes to the market for office space, it is clear that customers are still willing to pay up for premium locations in London's West End. That's good news for the likes of Great Portland Estates (GPOR) and Land Securities (LAND), although the latter has injected a note of caution by restricting its development arm to operate on a pre-let basis, while financing development through disposals rather than increased debt.
For smaller businesses, Workspace (WRK) continues to expand its offering of small offices, designed to provide an attractive working environment and flexibility for those companies wishing to change their requirements and expand their space when needed. It is also likely to benefit from a continued supply of suitable development sites, as parts of London hitherto defined as unfashionable become acceptable places to live and do business.
A change in consumer shopping habits more towards click-and-collect services is good news for the likes of LondonMetric (LMP). Its highlight last year was to secure a deal with Primark, whereby the retailer signed a 25-year lease on a 1.1m sq ft warehouse. This sort of deal is likely to be repeated as retailers work towards creating a hub of distribution points, and LondonMetric has a further 1.4m sq ft in the development pipeline.
For West End landlord Shaftesbury (SHB), trading conditions could hardly be better. With large chunks of Carnaby Street, Soho and Covent Garden within its portfolio of shops, restaurants, offices and residential apartments, Shaftesbury has high exposure to the tourist industry which is less cyclical than broader economic trends. It's a personal favourite of ours.
Growing awareness of the self-storage sector has also given Big Yellow (BYG) a lift, helping to drive occupancy rates higher and prompting the company to increase the number of facilities in the prosperous south-east of the UK. This is expected to boost storage space by more than 0.5m sq ft. A housing market characterised by strong demand has allowed Big Yellow to push rents higher, although a recent decline in transactional volumes may have some effect on growth levels.
| NAME | Price (p) | Market cap (£m) | PE (x) | DY (%) | 1-year change (%) | Last IC view: |
|---|---|---|---|---|---|---|
| ASSURA | 53 | 872 | 25.4 | 3.9 | 7.2 | Hold, 54.75p 20 Nov 2015 |
| BIG YELLOW GROUP | 732 | 1,151 | 8.6 | 2.7 | 19.1 | Hold, 742.5p, 17 Nov 2015 |
| BRITISH LAND | 715 | 7,355 | 22.8 | 4.1 | -10.8 | Buy, 751p, 14 Jan 2016 |
| DERWENT LONDON | 3,258 | 3,622 | 4.5 | 1.0 | 2.8 | Buy, 3,760p, 26 Nov 2015 |
| GREAT PORTLAND ESTATES | 756 | 2,600 | 26.9 | 1.2 | -0.2 | Buy, 884p, 11 Nov 2015 |
| HAMMERSON | 570 | 4,467 | 22.3 | 3.9 | -12.8 | Buy, 625p, 30 Sep 2015 |
| HANSTEEN HOLDINGS | 111 | 797 | 6.3 | 4.3 | 1.7 | Hold, 113.8p, 28 Aug 2015 |
| INTU PROPERTIES | 290 | 3,902 | 21.2 | 4.9 | -15.8 | Hold, 328.4p, 30 Jul 2015 |
| LAND SECURITIES GROUP | 1,081 | 8,547 | 24.9 | 3.1 | -12.8 | Buy, 1,244p, 10 Nov 2015 |
| LONDONMETRIC PROPERTY | 155 | 970 | 6.3 | 4.8 | 2.0 | Buy, 164p, 10 Dec 2015 |
| REDEFINE INTL.REIT | 48 | 710 | 15.8 | 6.7 | -13.1 | Hold, 56p, 28 Oct 2015 |
| SAFESTORE HOLDINGS | 338 | 702 | 22.4 | 2.1 | 30.0 | Buy, 336p, 22 Jan 2016 |
| SEGRO | 418 | 3,126 | 3.9 | 3.2 | 3.6 | Buy, 440.5p, 28 Jul 2015 |
| SHAFTESBURY | 861 | 2,396 | 66.2 | 1.8 | 8.0 | Buy, 911p, 17 Dec 2015 |
| WORKSPACE GROUP | 856 | 1,389 | 40.2 | 1.5 | 8.4 | Buy, 926p, 12 Nov 2015 |
Favourite
The most attractive dividend comes from Primary Health Properties (PHP), which is now expected to be covered by earnings, thus removing the major minus point. Furthermore, with the government its largest landlord, rental income looks pretty secure.
Outsider
Looking less attractive is UK retail mall owner Intu (INTU). On the plus side, there is evidence that negative like-for-like rental growth is starting to reverse, but any improvement in underlying earnings is likely to be trimmed by legacy costs, including liabilities on swap agreements, which will create exceptional charges for at least the next three years.
