The Olympics Buy Signal For London

Published in Investing on 3 July 2012

The UK's capital is about to have a global spotlight shone onto it.

London is not only the capital of Britain; it is also the capital of the financial world. In just three weeks, London hosts the 30th modern Olympic Games, and the resulting global media attention should provide a big boost to its economy over the next few years. Investors might wish to consider whether they can profit from this.

The global city

The City of London has become a global financial services centre in large part because it is located in a time zone that lies roughly between the Americas and the Far East, and it is in a country that doesn't tolerate corruption in public life and strongly respects property rights and the rule of law.

London's position is further strengthened because English is the de facto global language, thanks to the expansion of the British Empire in the 18th and 19th centuries. Furthermore, London has traditionally welcomed foreigners, which means that many want to live and work there, especially the wealthier ones and those with an entrepreneurial attitude.

This has made London one of the most open and internationally minded cities on the planet, and it would be no surprise to see a lot of business coming to London in the next few years because the Olympics will drastically increase its profile upon the world stage.

The downsides

The high salaries paid in the City of London, together with the large number of very wealthy foreigners who have recently moved there because it is seen as a safe-haven in uncertain times, have fuelled a property boom, and these sky-high property prices make it difficult for some businesses to attract and retain staff, unless they're prepared to commute long distances.

While London is a magnet for multinational corporations, in particular miners like BHP Billiton (LSE: BLT), because of the extensive support services and commercial infrastructure that the City already provides, the overstretched physical infrastructure such as its overcrowded roads, congestion on the Underground and the need for more flights at Heathrow Airport, is seen by many people as holding London's economy back.

Location, location, location

There are several quoted companies whose business is focused upon London. The sector that immediately springs to mind is commercial property, where several billion-pound companies have portfolios that are located exclusively in central London such as Shaftesbury (LSE: SHB), which owns much of Carnaby Street and Chinatown.

Last week I wrote about five of these companies, and showed that they differ from the rest of the UK property sector because their shares generally don't trade a discount to their net asset value (NAV). The big exception is Songbird Estates (LSE: SBD), which owns 63.9% of Canary Wharf Group, but isn't on most investors' radars because it doesn't pay a dividend and it has two sovereign wealth funds as its dominant shareholders.

You can easily find property companies whose portfolios are outside London where their shares are trading at discounts of 25% or more to their NAV. The difference reflects the strength of the London property market, the potential for new developments and the fact that the stock market has less faith in commercial property valuations outside London.

Some other companies

Otherwise it's pretty much a case of looking at companies that do a lot of business in London. A good example is the regional brewer and pub operator Fuller, Smith & Turner (LSE: FSTA), which has managed to increase its dividend in every year since 1974 and whose pubs are predominantly situated in London and the South East.

Then there are the construction companies that are based in the South-East and have a good track record in infrastructure projects, such as Galliford Try (LSE: GFRD), the company that built the roof over the centre court of Wimbledon, and Morgan Sindall Group (LSE: MGNS).

Companies like these should benefit from additional spending on public works, given that 84% of infrastructure spending on transport already goes on projects that are located in South-East England, as well as new house building in London.

Passing on the cost

Montreal is the textbook example of how expensive it is to host the Summer Olympics, having taken 30 years to pay for hosting the 1976 Games. But London isn't in the same position because much of the cost of the 2012 Olympic Games is being borne by central Government and the National Lottery fund, which has meant that charities have lost a lot of funding.

Yet London will get the vast majority of the media exposure and the benefits of the investment in infrastructure that was needed to stage the Games. However, anyone who thinks that this means that London is being unfairly subsidised by the rest of the country ought to be aware that London already subsidises the rest of Britain by roughly £15 billion a year.

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> Tony owns shares in BHP Billiton, Morgan Sindall Group, Shaftesbury and Songbird Estates, but he doesn't own shares in any of the other companies mentioned in this article. He used to live and work in central London and Canary Wharf.

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rober00 03 Jul 2012 , 4:48pm

"and it is in a country that doesn't tolerate corruption in public life "

Although it is allowed in areas of it private one, led particularly by the banking industry, where corruption appears to be endemic!!!

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