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Robert Stephens, CFA, discusses the investment potential of three FTSE 350 REITs – Landsec, Tritax Big Box and Great Portland Estates.
Low valuations across the real estate investment trust (REIT) sector suggest that UK commercial property is unpopular among investors. Brexit uncertainty, a slow pace of economic growth and an evolving business sector could be key reasons behind this.
Those attractive valuations could offer a long-term buying opportunity for investors – particularly among the following three REITs that seem to be well placed to capitalise on growth opportunities within their specific locations and market segments.
The UK commercial property market’s history has frequently displayed a two-tier performance when it comes to growth. Assets located in London have generally outperformed their regional peers, with factors such as consistently strong footfall, high levels of employment and mass tourism being contributing factors.
This suggests that London-focused Great Portland Estates (LON:GPOR) could experience high demand for its enviably-located portfolio of West End commercial properties. A shortage of supply and the fact that many of its properties are situated in conservation areas mean that rental growth and occupancy levels could remain robust even as Brexit-related uncertainty persists.
The eventual opening of Crossrail in 2021 could further boost footfall across the company’s locations, with many of its properties being close to Elizabeth line stations.
A buoyant London economy could also benefit FTSE 100 REIT Landsec (LON: LAND). It is aiming to reposition its portfolio so that a larger proportion of it is focused on the capital.
Alongside this, the business is investing in market segments that currently offer a fast pace of growth. For instance, its investments in flexible office space have recorded high demand and are helping the company to overcome the challenges it faces within the retail environment. Landsec’s £3bn pipeline of development opportunities will shift its emphasis further towards the office market. It continues to experience high demand – particularly in London.
Commercial property companies are experiencing major changes in shopping habits across the UK. As highlighted, the increasing proportion of retail sales that are conducted online means that companies such as Landsec are experiencing reduced demand for retail space, with many bricks-and-mortar retailers struggling to adapt their business models to compete with online rivals.
Other REITs, however, are capitalising on the growth in e-commerce. They include Tritax Big Box (LON:BBOX). It owns a range of warehouses and industrial units that are benefiting from a shift towards online shopping which is showing little sign of abating. In fact, in the next five years e-commerce sales in the UK are forecast to rise at a compound annual growth rate of 5.2%. This could catalyse the company’s financial performance.
In spite of their long-term growth prospects, REITs such as Landsec, Great Portland Estates and Tritax Big Box trade on low valuations. For example, they have price-to-book ratios of 0.7, 0.9 and 1.1, respectively.
Therefore, even though political and economic risks facing the UK may be heightened in 2020, there could be buying opportunities. All three stocks are successfully implementing their strategies and are poised to capitalise on the growth potential on offer within their various geographies and market segments.