How to make a killing in property

With interest rates at record lows, investors have targeted equities and other assets where returns are far better. As a consequence, certain sectors have witnessed a sharp rise in share prices, among them UK real estate investment trusts (REITs). Naturally, investors are now asking whether the underlying real estate is entering bubble territory, and if the shares are over-valued.

Well, Sue Munden, an analyst at Panmure Gordon thinks not. In a colossal 172-page note, she argues the recovery so far has been driven to a degree by the safe haven status of sterling and the resilience of the London property market. "Going forward the fundamental driver of UK economic growth will provide a more robust platform for higher returns and capital values."

Physical real estate offers investors both income and capital growth which is especially attractive in a low interest rate environment, says the broker. "The UK Real Estate Investment Trusts (REITs) offer a tax-transparent access to those returns which level the playing field compared with direct investment."

"Fundamentally demand drivers of economic growth, high levels of employment and robust investor appetite coupled with limited new supply and low funding costs, should deliver high single digit to mid–teens total returns to shareholders over the next two years. In benign markets it is the strategy and ability to deliver which will differentiate the performance of shares in the REITs."

Panmure begins coverage of nine REITs with a focus on the strategy employed by the management, its relevance to the changing accommodation requirements and the ability to deliver. It’s valued them using a variety of short term and long term measures it feels provide a more balanced view of their future prospects.

"Our conviction 'buy' is Shaftesbury with Derwent, LondonMetric (LMP) and Hammerson all expected to perform strongly," says Munden. "Intu is our only 'sell' recommendation reflecting the challenges we believe the company still faces to address the fast paced changes in retail."

If Shaftesbury gets its right, shares in the West End landlord could be worth 1,106p, reckons Munden, 31% more than the current share price of 846p. "The focus is tight and yet rents vary considerably through the tangled alleys of Soho and the Central West End providing plenty of upside to income potential." Crossrail will help, too.

Derwent London is also undervalued. It owns a 5.7 million square foot portfolio of London office property near good infrastructure links and adjacent to prime central London pitches. An enviable track record make management one to back, says Munden, who thinks the shares are worth 4,233p (currently 3,525p)

Retail park and distribution centre owner LondonMetric, which merged with London & Stamford two years ago, is now in a position to cover the dividend and grow income, while shopping centre heavyweight Hammerson has a considerable development pipeline, including two prime shopping centres which will service Greater London into the next decade.

Panmure slaps a 199p target price on LondonMetric (164p) and 802p target on Hammerson (679p).

However, snapping up major UK shopping centres in an effort to scale up has not worked quite so well for Intu Properties, argues Munden. "Some of the acquisitions have been very positive for shareholders, we believe, for example Intu Trafford. However, the investment in acquisitions looks to have been to the detriment of its other centres which are now slipping down the ranks of UK top centres." Sell at 354p, she says, placing a 288p target on the shares.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.