Guy Barnard, Co-head of Global Property Equities, comments on the recent sale of The Leadenhall Building, the largest ever property transaction in the UK. While uncertainty about the outlook for UK property has increased following the Brexit vote, the deal highlights the divergence between the direct and listed property markets with continued foreign interest in key London assets.
UK REIT (real estate investment trust) British Land and its joint venture partner Oxford Properties announced on 1 March 2017 that they have exchanged contracts for the sale of The Leadenhall Building (nicknamed the ‘Cheesegrater’ for its distinctive wedge shape) in the heart of the City of London to Chinese property company CC Land. The proposed sale price of £1.15bn makes it one of the largest ever single property transactions in London, representing a net yield of around 3.5%.
Strong demand for London property despite Brexit vote
For British Land, the price represented a significant premium of around 25% to the asset’s latest appraised value. Although a unique asset, the sale highlights the ongoing strength of international demand for London property in spite of the uncertainty following the UK’s vote to leave the European Union. While the direct property market has bounced back from the immediate declines after the Brexit vote (with assets such as this selling at prices higher than before the referendum), UK REITs remain out of favour and continue to trade at significant discounts.
Source: iStock. Credit: AIphotographic
British Land premium/discount to net asset value (NAV)
Source: UBS, Thomson Reuters Datastream, Henderson Global Investors. Data from 28 January 2007 to 28 January 2017.
In the case of British Land, the shares currently trade at a discount to net asset value of c.30% (see chart). While we do not expect stocks to trade at net asset value given the opaque outlook for UK property we think the current discounts are overly pessimistic. In particular, real estate companies are operating with relatively low leverage compared to pre-Global Financial Crisis levels, with robust and growing income streams. As an example, British Land at 6 March 2017 offers a 4.7% dividend yield.*
In our view, British Land currently offers a potentially more attractive entry point to access property for an investor with a medium-term investment horizon.
*Yield may vary and is not guaranteed.
Note: The above example is intended for illustrative purposes only and is not indicative of the historical or future performance of the strategy or the chances of success of any particular strategy. Henderson Global Investors, one of its affiliated advisors, or its employees, may have a position mentioned in the securities mentioned in the report. References made to individual securities should not constitute or form part of any offer or solicitation to issue, sell, subscribe or purchase the security.
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