A year ago, the possibility of a rise in UK interest rates played a part in depressing investor sentiment in the real-estate sector. Those fears were misplaced, but there is always something to worry about. If this time last year we had predicted the vote for Brexit and the election of Donald Trump as US president, we would have attracted considerable criticism. So it would be unwise to rule out further shocks.
Last year, potential gold mines such as St Modwen's (SMP) 57-acre joint venture at Nine Elms and Capital & Counties' (CAPC) 70 acres of prime land at Earl’s Court suddenly became millstones around the developers’ necks as prime London property fell back. Then, with the UK voting to leave the EU, concerns rose that the economy would slide into recession and demand for office and residential space would evaporate. That hasn’t happened yet – despite the price volatility immediately after the vote – but no one is looking forward to two years of uncertainty over the job market as exit negotiations play out. CapCo has certainly experienced a slowdown in sales at Earl’s Court, and this is a worry as the site has the potential to hold 7,500 homes. For St Modwen, there is some comfort in its 6,000-acre land bank, including the 468-acre former MG Rover site at Longbridge, and demand for new space in large regional cities is more robust.
Shares in Grainger (GRI) held up most strongly over the past year, thanks to its repositioning into the build-to-rent sector. Meanwhile, sentiment dragged on CLS (CLI), despite the fact that it has a diverse revenue stream, including in France and Germany, and that most of its UK tenants are government departments. Unlike conventional estate agents, Savills (SVS) has been diversifying its revenue stream away from UK-based private housing sales and has a sizeable Asia-Pacific operation, as well as offering consultancy and facilities management services and asset management. Trading was particularly strong in 2016, and profits are expected to be well ahead of earlier estimates.
| Price (p) | Market value (£m) | PE (x) | Yield (%) | 1-year change (%) | Last IC view | |
| Capital & Counties | 280 | 2,370 | 254.6 | 0.5 | -24.8 | Sell, 282.3p, 27 Jul 2016 |
| CLS | 1,592 | 649 | 7.4 | 0.0 | -5.1 | Hold, 1,350p, 18 Aug 2016 |
| Daejan Holdings | 6,320 | 1,030 | 6.5 | 1.5 | 5.8 | na |
| Grainger | 238 | 992 | 23.3 | 1.9 | 8.8 | Buy, 220.3p, 5 Dec 2016 |
| Savills | 781 | 1,091 | 12 | 3.4 | -2.4 | Buy, 688.5p, 9 Aug 2016 |
| St Modwen Properties | 316 | 700 | 9.4 | 1.8 | -16.8 | Buy, 238.8p, 5 Jul 2016 |
Favourite: Grainger has moved itself into an area that offers considerable growth potential. With institutional funds now finding their way into the build-to-let market, Grainger is focused on rental income rather than capital growth just at a time when capital values are rising more slowly and demand for rented accommodation is growing.
Outsider: Capital & Counties has a vibrant property portfolio in London’s Covent Garden, where tenants are less exposed to the impact of the Brexit vote. But it is also saddled with that Earl’s Court scheme, which makes up a third of the portfolio.
