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Three FTSE 250 property shares that offer something different

Nicholas Hyett explores a selection of specialist property companies listed on the London Stock Exchange.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

Nicholas Hyett, Equity Analyst

Published on 30 January 2020

This article is more than 6 months old

It was correct at the time of publishing. Our views and any references to tax, investment and pension rules may have changed since then.

Several of the UK’s largest listed property firms have struggled in recent years.

Retailers have been closing stores as they look to deal with falling footfall and online competition, which has been bad news for landlords. Traditional office space hasn’t been much of a safe haven outside the capital either, as Brexit concerns dampened investor demand for UK assets. Between them, retail and offices account for some 64% of the UK commercial property market.

Whether the fall in UK property value is justified remains to be seen. However, for those prepared to look at something a bit more specialist, we think the UK property sector offers some potentially interesting opportunities.

Please remember that all investments rise and fall in value, so you could get back less than you invest. The information provided is not personal advice and if you’re unsure, seek advice.

Tritax Big Box

Tritax will be familiar to many regular readers. As the name might suggest, the group specialises in ‘Big Box’ logistics facilities – giant warehouses, ideally over 500,000 sq.ft. and located close to a major motorway.

Many of the group’s customers are retailers, which might seem a headwind. But unlike the shrinking store estate, big box warehouses are business-critical assets. Entire distribution networks are often built around key warehouses, which are also critical for modern e-commerce giants like Amazon.

For tenants, changing location is costly, risky and time-consuming, which makes them extremely sticky. Some have even sought to extend leases many years before their scheduled expiration, so determined are they to retain the use of the facility. A crucial position in companies’ supply chains also means Tritax can impose attractive terms on its tenants such as upwards only rent reviews.

A wide range of high quality tenants should add security to the rent roll and therefore the dividend (as a real estate investment trust (REIT), Tritax is obliged to pay out the majority of profits after management costs).

What is a Reit? Download our five minute guide

However, Tritax is also well positioned to benefit from the fact its assets are scarce. Sites a little over the size of four football pitches conveniently located next to major transport links are few and far between. The group’s experienced team have proven adept at securing attractive assets in off-market transactions, meaning sites are snapped up before others even know they're for sale. With demand expected to increase over the years to come, a dominant position in a scarce asset could see the net asset value (NAV) of the group’s portfolio rise.

There is a significant caveat though. Because of its REIT status, Tritax can’t retain much cash in the business, and that means it has to regularly issue new shares to fund purchases. As a result, capital growth is likely to be steady rather than spectacular, and a rapid rise in interest rates could hit the value of the portfolio, and thus the shares.

Still, we view Tritax as attractive, particularly for income-seeking portfolios. The prospective yield is 5% and we'd expect further steady growth, but please remember that yields are variable and are not a reliable indicator of future income.

See the latest Tritax Big Box share price, charts and how to trade

Tritax Key Information Document

Grainger

Housing is something of a national obsession. It’s helped that the average house more than quadrupled in value between 1992 and the end of 2019 according to data from the Halifax. That’s benefitted homeowners across the UK, and underpinned the surge in popularity of buy-to-let properties. However, it’s a difficult trend to get exposure to through the stock market.

Grainger is one of the few names in the sector exclusively focused on residential property. The group owns and rents out 5,600 purpose built Private Rental Sector (PRS) homes and 3,300 regulated tenancies (pre-1989 lease agreements where the tenant has the right to reside for life).

General market trends are pretty supportive for the PRS. PwC reckons there will be 7.2 million households in the sector by 2025, compared to 4.8m today. Meanwhile changes to buy-to-let tax breaks mean individual landlords are exiting the sector, squeezing supply. All things being equal the combination of increased demand and decreasing supply should push up the amount Grainger can charge in its purpose built rental portfolio.

The group’s £2.9bn portfolio makes it the largest residential landlord on the stock market. It delivered 3.4% rental growth in its private rented estate in 2019, with occupancy rates of 97.2%, while rents from the regulated portfolio actually grew slightly quicker (although remain below market rates). Future rental growth is underpinned by investment in the new Connect platform – which is expected to improve both customer experience and efficiency.

A pipeline of 9,000 new homes means the company has ambitious plans for expansion in the future. That includes a partnership with Transport for London to develop homes for rent on surplus land, with development clusters in key regional cities as well. Recycling cash from regulated tenancies as they fall vacant helps to fund that investment, but there’s a significant debt pile too (which at 37.1% loan-to-value we consider to be at the higher end).

However, Grainger’s not the only player to have recognised the PRS is an attractive place to be. While Grainger’s long experience in the sector does give it an advantage over more recent entrants, increased competition from the likes of Legal & General risks pushing up the cost of new sites. That would reduce long-term rental yield.

Exposure to the housing market also cuts both ways. While interest rates are low, house prices are high, but if rates jumped you would expect house prices to fall, and that would knock the value of Grainger’s rental portfolio.

It’s worth noting that Grainger isn’t a REIT, and its dividend policy aims to pay out 50% of net rental income as a dividend rather than the 90% of rental profits required of REITs, and it also generates substantial profits from property sales. The dividend’s lower as a result, with a prospective yield of 2.2%, but it could also mean growth in the estate can be delivered faster. However, remember that there are no guarantees.

Overall we think Grainger could be an interesting way to access the UK residential property market, while avoiding the hassle and concentration risk of buy-to-let property.

See the latest Grainger share price, charts and how to trade

Workspace

Having said that we’d look at property companies offering something a little different, the final REIT is actually focused on offices. But these offices offer tenants something unusual.

Workspace is in the business of flexible office space in London.

To be clear, we’re not talking WeWork style collaborative working (although Club Workspace does give the group a small amount of exposure to that side of the industry). Workspace is aimed at smaller SME type companies with around 10-15 employees, and offers them a blank canvas office space in a building with multiple other tenants. Unlike most large landlords, Workspace’s average tenancy is just two years, with a rolling 6 month break clause.

This set up works well for small businesses moving into their first formal office space, but also for more established businesses that like the community vibe that Workspace sites actively seek to promote. High degrees of satisfaction support 91.8% occupancy and mean tenants frequently seek to renew at the end of their agreements.

Unfortunately the combination of smaller companies and short leases means Workspace lacks the revenue certainty of some larger REITs. Smaller companies are often more vulnerable to an economic downturn, and a larger proportion of lease agreements are up for renewal in any given year. Workspace is prepared to flex prices to meet these peaks and troughs in demand, and does so on a weekly basis. That helps to make sure cash keeps rolling in, even if it means profits will rise and fall with the economic cycle.

Perhaps in acknowledgment of its economy sensitivity, the group is currently running a conservative balance sheet, with a loan-to-value of just 21%. That should provide the group with plenty of firepower for acquisitions as and when opportunities arise.

Similarly to Grainger though, demand for sites can be intense. That’s potentially bad news for growth, if it limits opportunities to acquire and develop new sites, and also increases the risk of overpaying. On the flip side, because Workspace owns all its sites outright, increased demand increases the net asset value of properties already in the portfolio.

As a REIT, Workspace is required to pay out the majority of its rental income as a dividend, and the stock currently offers a prospective yield of 3.2%. Please remember that yields are variable and not a reliable indicator of future income. Investors should note that the stock is currently trading well above its long run average of 0.89 times book value, at 1.1 times.

See the latest Workspace share price, charts and how to trade

Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Past performance is not a guide to the future. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.

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