Why momentum in some property shares is unjustified

The dive in equity markets last year threw up plenty of opportunities for investors to pick up some quality companies at heavily depressed valuations. That property stocks suffered some of the heaviest falls is not surprising. The March lockdown not only forced housebuilders to down tools, but sparked wider concerns about a collapse in house sales and prices. Meanwhile, forcing high-street stores to shut meant many retailers held back on paying rent, causing sharp falls in asset values. 

The prospect of reopening society has naturally kickstarted the biggest rally in the shares most severely punished by the economic impact of the pandemic. 

Since news of the Pfizer vaccine broke in early November, retail landlords Capital and Regional (CAL) and Hammerson (HMSO) have generated the highest total returns within the UK-listed real estate investment trust, housebuilding and real estate services sectors. The latter has come out on top since the start of this year, posting a return of almost 54 per cent, according to data compiled by FactSet.

Other companies featuring in the top 10 list of highest total return stocks since the start of the year include buy-to-let specialist estate agency Belvoir (BLVR), global real estate services group Savills (SVS) and housebuilder Vistry (VTY).

Yet the momentum generated by some so far this year should not be viewed as instructive for those looking for investment inspiration. The chance of a sustained rerating for commercial landlords such as Hammerson and Capital and Regional seems remote, even if the former does this time manage to offload its seven retail parks to new potential bidder Brookfield. 

Rent collected from retailers dropped to 15 per cent for the first quarter of this year, according to data from property management platform Re-Leased. With some occupiers having not paid rent for more than a year, the prospect of landlords recouping much of the money owed from tenants that have burned through cash at an accelerated rate over the past year is unlikely. 

Even prior to the pandemic, rental and asset values were falling at a pace across high-street stores and in shopping centres. Meanwhile, the number of retailers launching company voluntary arrangements has risen. Unsurprisingly, loan-to-value and interest cover ratios have been pushed closer to the limits of companies’ debt covenants. 

Yet shares in Hammerson are trading at around 0.6 times forecast book value, the highest point since November 2019. For Capital and Regional, a price/next 12 months’ book value multiple of 0.7 is a more than two-year high. That follows a year when the number of stores at risk of being closed, or that have already shut their doors, was at its highest level in more than a decade, according to the Centre for Retail Research. 

Elsewhere, there is more reason to believe that the rerating will continue. The need for rental housing is unlikely to abate given the affordability difficulties associated with home ownership. That bodes well for PRS Reit (PRSR), which has already generated a 24 per cent total return since the start of the year. Meanwhile, shares in housebuilder Vistry still look undervalued at 10 times forward earnings, given the strong level of homes already sold is forecast to result in earnings above pre-pandemic levels this year.