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The process of the UK leaving the EU was never going to be a smooth one. Undoing decades of increasing integration in a short timeframe was always going to be a major challenge. Add a weak government with a history of differing views on Europe within its own ranks to the mix, and the uncertainty which is now present is not a major surprise.
In the short term, UK real estate investment trusts (REITs) such as Shaftesbury (LON:SHB) and British Land (LON:BLND) could experience a period of volatility. However, with both companies offering low valuations and sound strategies, they could deliver improving performance in the long run.
Brexit risks
Since the EU referendum, the performance of the UK economy has come under pressure. The Bank of England has downgraded its GDP growth forecasts, consumer confidence has fallen and business confidence has also been mixed. In the near term, the situation is not forecast to improve significantly. The UK’s GDP growth rate is expected to be around 0.5% over the next couple of years, while consumer confidence is due to remain downbeat. This could lead to a challenging period for companies that are focused on the UK.
Moreover, there could be further twists and turns regarding the Brexit process. A number of senior Conservative MPs are unhappy with the Prime Minister’s plan. ‘Remainers’ would like a second referendum, while ‘Brexiteers’ feel that the current strategy does not represent what the public voted for in June 2016. As a result of this situation, as well as the narrow majority which the government has, the Brexit process could cause greater disruption than it otherwise would. As such, UK-focused companies could experience a period of heightened share price volatility.
Investment potential
Of course, an uncertain period for the economy could mean that shares such as Shaftesbury and British Land offer larger margins of safety. The two REITs trade on price-to-book ratios of 1.1 and 0.7 respectively. Those figures suggest that they may be undervalued at the moment.
In Shaftesbury’s case, it could prove to be well-insulated from the challenges faced by the wider UK economy. In previous periods of economic difficulty, its concentrated portfolio in London’s West End has offered greater resilience than the wider economy. Demand for offices, restaurant space and other leisure facilities has historically exceeded supply in the West End, and this situation is unlikely to change due to London’s appeal to both domestic and international visitors.
Although British Land has seen challenges in its retail segment according to its recent update, its overall performance remains strong. Its office development pipeline has seen encouraging levels of demand, with it now being 64% let or under offer. Furthermore, the company has been able to reduce its LTV to 26%, and appears to have an attractive development pipeline.
While both REITs could experience a relatively challenging operating environment as the Brexit process continues, their low valuations suggest that in the long run they may deliver high rewards.