Rising prices across the real estate sector have boosted the value of many real-estate investment trusts (REITs). Because of this, earnings per share for many REITs have been inflated by valuation gains, which are non-recurring. Although valuations have risen, rental yield compression has meant that rental income has actually grown much more modestly.
Land Securities (LSE: LAND), British Land (LSE: BLND) and Hammerson (LSE: HMSO) are the three largest UK listed REITs, with a combined market capitalisation of over £24 billion.
| Price/NAV | Price/Underlying Earnings | Forward Dividend Yield (%) | |
| Land Securities | 0.99 | 32.0 | 2.5 |
| British Land | 1.05 | 28.6 | 3.3 |
| Hammerson | 1.05 |
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3.2 |
These three large-cap REITs are valued between 0.99x to 1.05x their net asset values (NAVs), with Land Securities being the cheapest and also the lowest yielding. This reflects the relatively larger size of Land Securities’ development portfolio, as the company sold much of its investment portfolio in recent years to fund new developments. But, the potential for greater valuation gains from its development pipeline, which is particularly concentrated in London, makes Land Securities probably the most attractive of the three. British Land also has significant exposure to London office space, a market which attracts almost unparalleled global investments and benefits from low vacancy rates. Hammerson’s much smaller exposure to London makes it relatively less attractive.
The following smaller REITs are higher yielding and seem to have greater potential for capital appreciation:
SEGRO (LSE: SGRO) focuses on warehousing and light industrial properties across eight European countries, but principally in the UK, Germany, France and Poland. This geographical mix positions the company to benefit from the ECB’s asset buying programme, which will likely lead to higher asset prices. In addition, yields on similar properties tend to be much higher yielding in Central and Eastern Europe. Although valuation gains on industrial units have so far been limited; investment yields have been far greater. SEGRO’s portfolio of under development properties have a projected yield on total development costs of 8.6%. On the opposing argument though, vacancy rates are typically higher and vary more substantially over the business cycle. The company’s latest trading update in April showed vacancy rates actually increased to 6.7% during the first four months of 2015, from 6.3% in 2014.
SEGRO is currently trading at a 10% NAV premium; but the combination of high yielding developments and further potential for substantial valuation gains means the premium is deserved. Its shares have a forward dividend yield of 3.7%.
Intu Properties (LSE: INTU), the shopping centre focused REIT, is currently trading at an 11% discount to NAV. Declining underlying earnings, caused by falling like-for-like net rental income, have caused investors to fall out of favour with intu. Large sized shopping centres, including intu Trafford Centre, intu Lakeside and intu Metrocentre, represent the bulk of the value of intu’s assets. These properties have fared better than smaller town centres, with strong valuation gains and growth in like-for-like rental income. The mix of underperforming assets with some very prime assets is the main cause of the REIT’s low valuation.
Intu’s dividend is likely to remain unchanged at 13.7 pence per share this year, as underlying earnings remain weak. This gives an indicative dividend yield of 4.1%, which is higher than any of the other REITs mentioned. Looking forward, the improving outlook in the retail sector could lead to higher rents, which should pass through to higher property valuations.
