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McKay takes the risk out of its portfolio

Demand for office space in London still outstripping supply
November 12, 2018

Horror stories predicting a collapse in the London office market continue to remain wide of the mark, as seen in half-year numbers from London and south-east focused landlord McKay Securities (MCKS). With the shares trading at a substantial discount to net asset value (NAV), a lot of potentially bad news has already been factored in, and while a doomsday outcome to Brexit cannot be discounted, McKay has sensibly removed the risk from its development portfolio through a series of new lettings. The speculative element of the entire portfolio has been pared down to just 4 per cent, largely comprising a distribution warehouse scheme at junction 12 of the M4 motorway. But with such a favourable location and continued demand for logistics space, there shouldn’t be too much trouble finding a tenant.

IC TIP: Buy at 255p

Back in London, a scarcity of decent office space is underpinning rents. Six of the 10 speculative schemes being built by various developers are already pre-let and only four schemes are in the pipeline for 2019, which means that the vacancy rate is now as low as 2 per cent.

During the six-month period, McKay completed seven open-market lettings at an average 8.3 per cent ahead of estimated rental value. The current portfolio has a reversion element of 23.1 per cent, if all existing rents were marked to market.

Analysts at Stifel are forecasting adjusted NAV of 334p a share at the March 2019 year-end (from 322p in 2018).

MCKAY SECURITIES (MCKS)  
ORD PRICE:255pMARKET VALUE:£240m
TOUCH:255-259p12-MONTH HIGH:289pLOW: 227p
DIVIDEND YIELD:3.9%TRADING PROPERTIES:£12.9m
DISCOUNT TO NAV:23%NET DEBT:50% 
INVESTMENT PROPERTIES:£479m  
Half-year to 30 SepNet asset value (p)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
201730016.517.62.8
201833111.412.12.8
% change+10-31-31-
Ex-div:22 Nov   
Payment:3 Jan