The generous yields on offer from housing stocks tend to enjoy most of the limelight when it comes to property dividends. But I’m not convinced that housebuilders are the best way to play the UK’s property market.
I believe that income from commercial property has the potential to offer far more stable long-term returns. With uncertainty growing about the stability of the housing market and Brexit on the horizon, that’s an important consideration.
Two of my preferred commercial property stocks are retail and office group British Land Company (LSE: BLND), and logistics specialist Segro (LSE: SGRO), in which I own shares. In this piece I’ll take a look at today’s Q3 update from Segro and highlight a potential buying opportunity at British Land.
A smart strategy?
Since the financial crisis, Segro has refocused its portfolio on logistics, rather than retail or office space. What this means is that the company has a portfolio of what are known as big box warehouses. These are typically located on key transport routes close to major European cities.
Tenants include Amazon, FedEx and many other such firms, plus other major retailers. In my view, the growth of internet shopping plus the uncertain outlook for the high street makes this strategy a smart move.
Today’s Q3 update from Segro makes dull but reassuring reading. David Sleath, Segro’s chief executive, says that “liquidity is starting to return to the UK investment market” after the referendum and that there’s “strong demand” for high quality warehouse assets.
I like the fact that Segro operates in Europe, not just the UK. The market seems to agree. Segro stock has regained all of the ground it lost after the referendum and is now trading up slightly on the year.
The downside of this is that the stock isn’t exactly a bargain: at today’s price of 438p, Segro trades in line with its book value and offers a yield of 3.6%. I’m tempted to wait for the next market wobble before topping up.
A tempting discount?
Former market darling British Land has been hit much harder by the fears about a Brexit recession. Shares in the firm, which specialises in prime office and retail space, fell sharply after the referendum. The stock is down by 23% on the year-to-date.
As a result, British Land shares now offer a forecast yield of 4.9% and the stock trades at a 34% discount to the group’s last reported net asset value of 919p per share.
Although it’s common for property stocks to trade at a modest discount to net asset value, the size of this discount suggests to me that the market is pricing in a modest decline in the value of British Land’s portfolio.
We’ll find out more when the firm’s interim results are published in November. But I think the current valuation could be a solid buying opportunity for long-term investors.
British Land’s portfolio is 99% occupied, with an average lease term of nine years. The group doesn’t need to refinance for four years and has a comfortable loan-to-value ratio of 30%. For investors who are willing to ride out any short-term volatility, I believe this stock could be a good buy at current levels.
