Robert Stephens, CFA, discusses the investment appeal of three FTSE 100 property companies after they experienced troubled trading conditions in the past 12 months.
The UK property sector has endured a very challenging 12-month period. Covid-19 has caused disruption and uncertainty within the residential and commercial property segments that could continue in the near future.
As a result, many FTSE 100 property stocks, including Barratt, British Land and Rightmove, are trading at lower prices than they were a year ago. In my opinion, they could offer long-term recovery potential due to a likely improvement in trading conditions and a rise in their valuations.
Housebuilder Barratt reported high demand for homes in its latest trading update. The company has benefited from government policy action to stimulate the housing market, including Help to Buy and stamp duty relief. Those policies are due to be watered-down and ended, respectively, at the end of March. This may be a reason why the stock’s price is 13% lower than it was a year ago, as investors price in a more challenging outlook.
Still, low interest rates could moderate the impact of changing government policy. The cost of home ownership as a proportion of annual salary is at undemanding levels versus historic norms. Further, an undersupply of new properties versus population growth could provide the right conditions for sustained high demand for new homes within the sector. Barratt’s forward price-earnings ratio of 13 suggests it could be undervalued on a long-term basis.
British Land may also be undervalued after its 21% share price fall in the past year. The REIT now trades at two-thirds of its net asset value. Investors seem to be pricing in an extended period of asset declines and rental collection issues in the sector that may not materialise beyond the next few months, as vaccine rollouts and a return to normality move further into reach.
The company is experiencing structural changes in the industry that are likely to see lower demand for offices and retail units as a result of Covid-19. These challenges may persist in the medium term. However, British Land’s loan-to-value (LTV) ratio of 36% and solid balance sheet, as well as plans to recycle capital to more productive uses via asset disposals and new investment, suggest its shares can move higher.
Rightmove has been proactive in helping its customers to survive the unprecedented disruption caused by Covid-19. For instance, it provided a 75% discount to agency and new homes customers for part of 2020. This contributed to a 34% decline in sales for the first half of the year.
More declines could be ahead as the economic cost of Covid-19 becomes clearer. However, Rightmove remains a hugely dominant online property portal. This could mean it is in an enviable position to enjoy improving trading conditions in a subsequent economic recovery. Its focus on innovation is helping to keep its products and services ahead of peers, while a £50 million net cash position and high cash conversion ratio suggest it has the financial means to weather the current storm.
Even though all three stocks have made gains in the past few months, an uncertain UK economic outlook may mean there are still margins of safety on offer. Ahead of a likely recovery as 2021 progresses, they could be turnaround opportunities in a property sector that has a bright long-term future.