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Robert Stephens, CFA, discusses why this commercial property company could deliver share-price growth.
Despite Brexit-related risks being elevated throughout most of 2019, commercial property owner Shaftesbury (LON:SHB) recorded share-price growth of 13% during the calendar year.
Further growth could be ahead for the real estate investment trust (REIT). Its shares still trade below net asset value, while its London-focused portfolio provides resilience and growth potential over the long run.
Brexit may have contributed to uncertain operating conditions for many UK commercial property owners, but Shaftesbury’s London-focused portfolio has been highly resilient. The company’s 2019 annual report highlights that its food, beverage and retail tenants have generally reported rising sales in the past year. This indicates that demand for its mix of commercial units is likely to remain high in future.
It also evidences London’s robust commercial property market. It has been removed from UK-wide economic challenges in the past owing to factors such as a high rate of employment in the South East, a resilient level of footfall and international tourism. The performance of the company’s portfolio could further benefit from the eventual opening of Crossrail in 2021. It will provide greater access to the geographically concentrated West End locations owned by the REIT.
Shaftesbury’s London portfolio is unique and would be almost impossible for a rival to replicate. All of its units are situated in conservation areas, while 20% of them are listed buildings. This give it a clear competitive advantage compared to other REITs, as well as long-term growth potential.
A changing business
As with many commercial property owners, the company is experiencing major changes within the retail sector. An increasing shift from bricks-and-mortar stores to e-commerce across a multitude of retail sectors means that demand for retail units is declining in many parts of the UK. This trend looks set to continue in 2020, as retailers prioritise online growth over their bricks-and-mortar operations.
In response, Shaftesbury is adapting its retail space to keep pace with evolving customer needs. It is offering smaller units to help retailers reduce their overheads, while increasing its exposure to sectors which offer growing levels of demand. They include flexible office space, with the company successfully trialling short and simple leases during 2019 that have so far proved popular.
Its long track record of adapting to changes in demand across a range of sectors could help it to evolve its offering in office and retail space during 2020.
Even after a 13% share price rise in 2019, Shaftesbury’s shares trade below their net asset value. They have a price-to-book (P/B) ratio of 0.9, which suggests that investors continue to be cautious about the company’s prospects as Brexit is yet to be concluded.
Shaftesbury’s past performance highlights the resilience of its West End portfolio. It could outperform the wider commercial property market in 2020, and may deliver growth in future years due to its enviable location and the company’s ability to adapt to changing customer needs. This may be reflected in further share price growth in 2020 and in the long run.