Cherry Picking Some Commercial Property Opportunities

Published in Investing on 2 December 2011

Are there any rich pickings from the commercial property fall-out?

It hasn't been the balmiest of times for commercial property investors. And it would seem there could be worse still to come, given all the fearful economic news we're hearing.

The good news is that the market tends to tar sectors with the same brush. But it's still a risky game. If excessive gearing causes loan to value (LTV) covenants to be breached, then healthy discounts to net asset values (NAV) won't be enough. Companies can still go into administration, or need to raise more cash.

So, in the spirit of trying to cherry pick a few bargains which have been unfairly bruised, I've had a look at a few; big and small.

The biggest

Back in July, big blue-chip British Land (LSE: BLND) was priced around its net asset value (NAV). It's been a sorry tale of woe since. The shares peaked at in this year at 630p before the summer sell-off, went as low as 452p in early October, and are now 500p.

This compares well to the latest EPRA NAV figure of 591p per share, whilst the yield is a healthy 5%. British Land's property portfolio is mainly focused on retail locations and Central London offices. Its occupancy rate is high and its loan-to-value (LTV) ratio is 45%.

For the safety first investor who would like some commercial property exposure, I think British Land is a perfectly reasonable long term buy and forget share. But it isn't exciting.

The smallest

Right at the other end of the size scale is Plymouth's own Sutton Harbour Holdings (LSE: SUH).

The trouble is, I thought the same a year ago, since when the shares have halved. The owner-operator of Plymouth's Sutton Harbour has run into problems with its former airline and its land holdings at Plymouth City Airport. It still owns the long leasehold of 104 acres of airport land and is in discussions with the freeholder, Plymouth City Council, over what to do next with it.

There's no getting away from it; this share has been a mini-disaster for me so far. But with the last NAV per share quoted of 57.3p and recent disposals worth £2.7m/4.3p per share, I'm hopeful the only way is up!

The rest

A much safer bet looks to be Daejan Holdings (LSE: DJAN). This week's interim results from the FTSE 250 developer revealed a NAV of roughly twice the current share price of 2,680p per share. This is one of the most attractive discounts in the FTSE 250. The company has a strong balance sheet, with gearing of only 16.4%, and takes a prudent approach.

The yield looks likely to be around 2.7%, though, so for those of us looking for some income while we wait for the capital rises, perhaps there may be better choices elsewhere. But you won't find many, if any, much safer than Daejan.

Both Public Services Properties Investments (LSE: PSPI) and Invista Foundation Property Trust (LSE: IFD) are very much at the other end of the income scale.

The latter property investment company's NAV of 47.3p per share compares well to the share price of 33.1p. But it's all about the dividend and its prospects for being maintained; because the yield is a crazily high 10.5%, paid quarterly.

With gearing at 42.3%, Invista reckons it has moved significantly closer to achieving its objective of having a fully covered dividend. Even if it's cut by a small amount, the yield is extremely high.

The same can be said of Public Services Properties, which owns 39 care homes in the UK, 14 care homes in Germany and Switzerland, and 140 post offices in the US. Its main client is UK privately-owned European Care Group.

Basic NAV per share of 118.4p compares well to the share price of 56.6p. If the company can keep up the dividend payments, the yield is another crazily high 12.3%. But it has said its dividend policy will be "evaluated" as part of the strategic review. I imagine it will!

The best…

Personally, my favourite commercial property play remains McKay Securities (LSE: MCKS), currently 113.1p.

My Foolish colleague G A Chester recently explained how McKay's shares were the equivalent of buying £1 for 60p.

I agree, and think the company's investments and conservative profile are a nice balance. McKay's recent purchase in Bracknell for £2.7m with an initial yield of 12.5% was jaw-droppingly lucrative. The preservation of cash during the good times should pay a handsome dividend in the bad.

McKay's EPRA NAV of 224p per share, LTV ratio of 47.2% and gross yield of 7.3% look nicely in balance, and the company still looks significantly undervalued to me.

Panther Securities (LSE: PNS) also looks good value following the recent sell-off which has seen its share price decline from 425p in June to 317.5p today. The same can be said for European property investment company Tamar European Industrial Fund (LSE: TEIF). I thought Tamar's shares looked good value in June at 47p. Now at 30.4p, there's too much fear priced in.

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More from David Holding:

> David owns shares in Sutton Harbour Holdings, McKay Securities, Invista Foundation Property Trust, Public Service Properties Investments and Tamar European Industrial Fund. The Motley Fool owns shares in Daejan.

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apprenticeDRL 02 Dec 2011 , 3:12pm

I have bought into McKay after reading GA Chesters article and doing a bit of research. I agree they look good as a long term bet and seem like good value at the current price.

They have declared 78% client retention at lease break which seems to be very good in the current climate. and bodes well for the future, they also seem to have good quality clients with 90% paying within 7 days.

Although they have lost the tenants for Great Surry House so hopefully they will let this again soon.

I agree that the current NAV looks good at 224 having been below 200 for the last couple of years.

The downsides are what will happen to property valuations if we get further downturn. The NAV could soon shrink and to my mind the directors share of the company is quite small.

Still I have had a punt as a long term investment. The yield is good.

mzappa70 02 Dec 2011 , 3:41pm

how about UKCM with no ZERO leverage ?

how about FCPT with net leverage of "only" 20% and with a lot of properties in the reselient WEST END London?

sageofyork 05 Dec 2011 , 2:15pm

I think I would wait another 6 months before trying property, it tends to be a trailing indicator ie. firms only want new premises and can only afford higher rents after the economy has turned.

nickgreaves 05 Dec 2011 , 5:15pm

Most of the larger property investment/development company share values peaked in early 2007 and all then collapsed so that most are now down to about 30% of what they were, including McKay, British Land, Hammerson and Land Securities. One exception of the larger companies was Shaftesbury which has most of its holding in the West End of London. Shafttesbury's share value has fallen 38% since early April 2007, better than most.

The pure investment companies have generally done better than those that develop as well as invest, since the value of development sites is twice as volatile as that of let investment property (my rule of valuers thumb). For instance TR Property Investment Trust has dropped only 39% since April 2007. My favourite is Picton Property income which is currently yeilding about 10% and what is more, its dividends are paid quarterly. It used to trade as ING UK real estate income trust although it is not a REIT. It share value was about £1 in April 2007 and now stand at about £.42 , par for the course but I cannot see its value falling radically again as a property investment company unless a fair number of its lessees default. If that happens, given the covenant strength of most of its tenants, then the value of everything else would have also disappeared.

Commercial propery values have fallen at a far higher trate than residential values, in the South East at least, and are now bumping along not far above the bottom. I would have thought that buying shares in commercial property ivestment comapnies must be failry safe and if they yield about 10%, then quite attractive as well.

The value of companies that specialise in development more than holding property is far more volatile and more likely to shoot up or down depending on the calibre and foresight of a few individuals at the top.

rustless 30 Dec 2011 , 10:11pm

What's the Foolish wisdom on Sutton Harbour Holdings' new share issue, announced a couple of days ago (entitlement 17 new shares per 50, new share price 18p, linked to a capital rearrangement which seems to hinge on a technicality - but I may be missing the real point)?

OceanClipper 05 Jan 2012 , 1:43pm

Personally I wouldn't touch their stock, the risk just isn't worth it unless you have very deep pockets. The phrase throwing good money after bad comes to mind.

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