UK Commercial Property

Some results today from Land Securities a major UK property investment and development company and a couple of Real Estate Investment Trusts (REITS). These help to highlight current trends in the UK commercial property market.
This has historically been a reasonable source of income for UK investors and can act as a diversifying asset when included in a portfolio with equities and bonds. Commercial property, being large and expensive is difficult for individuals to access directly so these companies offer a good way to gain exposure - if you want it.

Firstly then Land Securities who announced a third quarter interim management statement today. In this they mention good progress on developments and improved occupancy and mention their strong balance sheet with a loan to value (LTV) of 34.6% which is a lot lower than it was pre the 2008 downturn when they had to have a rights issue and cut the dividend. Since then they have been steadily increasing the dividend at a modest rate and today's announcement sees the quarterly payment increase by 2.7% to put the shares on around a 3% yield. This is also paid as a property income dividend which means the tax can be claimed if held in an ISA or pension which boosts the yield by 20%. They also offer a scrip alternative if you want to reinvest and compound this dividend directly. So no that exciting, but you are likely to get some growth in the net assets (or NAV which is another metric that investors focus on with property companies) as the market seems to be recovering just now, especially in London which they are well exposed to. The shares are however trading at a premium to the current NAV.

Further evidence of an improving property market and this spreading out beyond London now to secondary locations came from 2 REITS which also reported today namely Picton Property Income (PCTN) and Schroder Real Estate Investment Trust Limited (SREI). These saw 6.7% and 4.3% rises in underlying NAV's for the fourth quarter of last year reflecting their gearing into a recovering property market. Schroder Real Estate for example stated in their results:

 "...evidence of improving market conditions with the latest Investment Property Databank ('IPD') UK Monthly Index reporting a 1.5% increase in average capital values for December 2013, with the pace of growth increasing.  This contributed to a total return for the quarter to December 2013 of 4.7% and a total return for calendar 2013 of 10.9%.  The current stage of the recovery is notable for improving sentiment towards good secondary property outside of the core Central London markets.  This is partly to do with the yield premium available but also reflects an improving occupational market in some regions, as a result of economic growth and reducing levels of supply. "

Both REITS were able to issue new equity last year as they moved onto premiums as investors anticipated improved market conditions. Both offer decent gross yields (as they are based offshore) of around 5%. Of the two Picton's dividend is actually covered 1.22 by earnings whereas the Schroder fund is looking to build cover from its current 0.74x towards 1. Both are geared (total debt to gross property value) to the tune of about 50% so more geared than Land Securites which helps to boost the yield plus the fact that they are invested more in secondary property. However, both mention the improving market beyond London and as they have higher voids (9% PCTN & 12.5% SREI) than Land Securities (1.8%) there is also more scope for them to increase valuations and income if they manage to fill more of these vacant properties in an improving market.

All in all some nice yields and gearing into an improving property market, but not so much value now they are all trading on premiums to NAV reflecting some of the expected future growth already. 

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