British Land rounds off a solid week for property stocks (not that their share prices seem to care)

• British Land still trades at a 35% discount to net asset value

• 7 REITs trade at a discount of over 20% to net asset value

“A 2.6% increase in net asset value (NAV) per share and a 3% increase in the interim dividend at British Land, on the back of a 98% occupancy rate and healthy letting and renewal activity, would suggest that the UK’s commercial property market remains in rude health, especially after similarly solid updates from Great Portland Estates and Land Securities this week. However the stock market does not seem to be in the least bit interested,” says AJ Bell Investment Director Russ Mould.

“British Land may be up 2% this morning but the shares are still 10% below their high of 2017. This suggests investors are taking a dim view of the UK’s economic prospects in a post-Brexit world but note that the shares peaked in 2015 some 40% above where they are now, well before the referendum vote. Other factors are clearly at work, such as the impact of online retailers on the demand for physical space and the crushing falls suffered by real estate investment trusts (REITs) with retail exposure in the US this year.

“Investors looking at real estate stocks – and property has traditionally been a good hedge against inflation – therefore needs to look at four factors when it comes to judging the merits of a particular company.

“They are their geographic exposure (London, South-East and beyond), their industry exposure (physical retail and financial services are currently seen as worrying, warehousing for online retail and storage are currently seen as good); the average lease length; and the extent to which they are exposed to new-build development.

“This analysis helps to explain why the share prices of Safestore, Big Yellow and SEGRO are holding up so much better than those of Hammerson, Land Securities or INTU, for example but investors do need to ask themselves if some share prices are already factoring in a huge amount of bad news at the most downtrodden stocks.

“British Land and Land Securities, for example, trade at a discount of some 35% to net asset value, so huge drops in property values and rents are already expected by investors. It may therefore take relatively little – merely the absence of truly bad news rather than the delivery of good news in the form of big profits or dividend increases – to bring some of these stocks back into fashion with investors.”

Source: Company accounts, Thomson Reuters Datastream