2 UK shares offering good value for money ahead of an economic recovery

Robert Stephens, CFA, discusses the outlook for two seemingly unloved property firms – LandSec and Great Portland Estates. 

The pandemic has been extremely challenging for real estate investment trusts (REITs) LandSec (LON:LAND) and Great Portland Estates (LON:GPOR). Lockdown measures have caused sales for many of their tenants to plummet, while demand for their office, leisure and retail space has dramatically declined. 

However, they could offer good value for money ahead of their results releases next week. Their strategies, low valuations and the reopening of the economy could catalyse their financial and share price prospects. 

Great Portland Estates

The company’s London focus has failed to protect it from the challenges experienced across the sector in recent months. Footfall in the West End was 56% lower in the first six months of the firm’s financial year versus the prior year. This has led to lower levels of rent collection, although the firm reported an improvement in this area in its latest trading update.

Further improvements could take place as the UK economy reopens. Prime office locations and flexible space are in relatively short supply in London. This may provide the firm with growth opportunities as it pivots towards these areas. Indeed, its latest trading update highlighted a rise in enquiries. 

The company’s loan-to-value (LTV) ratio of 17%, liquidity of £465m and substantial headroom above debt covenants suggest it is well placed to ride out current operational challenges.

Meanwhile, its share price appears to offer good value for money following its decline since the start of the pandemic. It has a price-to-book ratio of 0.9. This suggests it contains a wide margin of safety in case threats such as a lack of tourism to London’s West End and a continued shift towards online retail and home working impair its asset values.

Certainly, further share price volatility and challenging operating conditions are likely to be ahead in the short run. But an economic recovery could spur demand for its prime London locations that leads to rising profitability in the long run.

LandSec

Landsec also has a strategy to capitalise on changing trends within the commercial property sector. It plans to recycle £4bn in capital over the coming years as it shifts focus towards growth sectors such as flexible office space and urban mixed-use schemes. 

In addition, the firm flagged development opportunities across older office stock in its latest results. They can be used for other purposes in response to changing consumer and working trends and could catalyse its future financial performance.

The firm’s balance sheet suggests it has the financial means to survive further short-term challenges, while investing in its portfolio for the long run. For example, it has cash and available facilities of £1.2bn, an LTV of 33% and adjusted net debt of £3.9bn. It is also prioritising schemes with the most favourable risk/reward opportunities while the economic outlook remains uncertain and rent collection is below previous long-term averages.

Landsec currently trades on a price-to-book ratio of 0.7. This suggests that investors are factoring in a fall in its asset values in the short run caused by the pandemic. This may also account for ongoing risks such as a return of lockdown measures and changing consumer habits. It could mean the stock is undervalued on a long-term outlook.