2 ‘bargain’ FTSE 250 shares with growth potential

Buying unloved shares with growth potential could be a sound strategy for generating high returns in the long run. Two companies which appear to offer just that are commercial property stocks Great Portland Estates (LON:GPOR) and Workspace (LON:WKP). The former owns a range of offices and retail units in London’s West End, while the latter provides flexible office locations across the capital.

Both companies are real estate investment trusts (REITs) which have solid track records of growth, improving financial outlooks and what appear to be solid portfolios. As a result, they could deliver rising share prices in the long run.

Valuations

Evidence of both stocks’ ‘unloved’ status can be seen in their valuations. Workspace has a price-to-book ratio of 0.9, while Great Portland Estates has a price-to-book ratio of 0.8. This suggests that investors are anticipating a period of difficulty for both companies – possibly due to the risks that the UK economy may face due to Brexit.

However, Workspace is expected to record EPS growth of 12% in each of the next two financial years. This follows five years of double-digit EPS growth. Great Portland Estates, meanwhile, is forecast to deliver a rise in EPS of 8% this year and 6% next year. This also follows five years of positive profit growth. Therefore, neither company appears to be facing a particularly challenging period. This suggests that they may be trading below their intrinsic values.

Growth potential

One of the reasons for the companies’ strong growth prospects in spite of a weaker outlook for the UK economy could be their focus on London. The two companies operate exclusively in the capital, which has a track record of delivering relatively robust economic performance during periods of uncertainty for the wider UK economy.


Given the fluid political situation at the moment, London’s track record of outperformance of the wider economy could be a desirable asset for the two companies to have. Although there is the potential for even the London economy to experience a period of negative growth in the short run depending on how Brexit turns out, in the long run its historic performance and international appeal could catalyse the performance of companies operating within it.

Bright futures

The potential for falling commercial property prices remains a threat in the near term. However, since both companies appear to have strong balance sheets, they may be able to capitalise on lower property prices in order to add to their portfolios and lock-in higher yields. Recent updates, meanwhile, have suggested that demand for their properties among customers remains robust.

Therefore, while Workspace and Great Portland Estates may not be popular shares at the moment, their future prospects and portfolios suggest that they could generate improving returns. Trading on low valuations, they may deliver high returns in the long run, with Brexit providing a degree of uncertainty in the short run.