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British Land shares surge despite jitters over commercial property

If you want a good indicator of how the economy has been doing, the fortunes of commercial property companies are a pretty useful one.

They generally tend to be regarded as rear-view mirror indicators, as the commercial property market tends to lag the economic cycle by between six months and a year, but they can also be forward-looking indicators as well.

The terms on which leases are agreed, for instance, are seen as a good barometer of the hiring intentions of employers and therefore the jobs market.

Another is yields – rental income as a proportion of the value of a property – which, when they fall, is a sign of growing demand.

As luck would have it, three of the UK’s largest commercial property firms have reported results this week, each offering plenty of insights.

Land Securities (LSE: LAND.L – news) , the UK’s biggest commercial real estate firm, reported on Tuesday. Great Portland Estates (Frankfurt: A0B53H – news) , which specialises in London’s West End, followed on Wednesday. And today, we heard from British Land (LSE: BLND.L – news) , the second-biggest player.

So, what have we learned?

In general, all three are reaping the benefits of past developments, while not yet seeing any fall-off in rents. Yet, to a greater or lesser extent, all three are cautious about the outlook.

Land Secs, which earlier this year sold its half-share in the Walkie-Talkie, the City’s second-tallest building, is clearly wary about the next few years.

Its chief executive, Rob Noel, grumbled that the glacial pace at which Brexit talks are proceeding has created uncertainty in the sector. Accordingly, the company is planning no new speculative developments in London – where Brexit uncertainty has raised doubts over office demand – for at least the next three years, concentrating instead on reducing its borrowings.

However, Mr Noel also revealed that the last six months had been the company’s best since the financial crisis in terms of leasing activity, with more than £50m worth of deals covering nearly one million square feet of development lettings, investment lettings and conditional pre-lettings.

In retail, where the company’s assets include a 30% stake in the massive Bluewater mall in Kent, Land Secs has yet to see too much of a downturn.

Great Portland is being similarly cautious. Toby Courtauld, its chief executive, revised upwards the company’s expectations of rental values, having previously predicted a downturn of up to 7.5%, reflecting what he called the better trading environment.

However, like Land Secs, Great Portland is also looking to sell assets, particularly to overseas investors and especially from Asia, whose appetite for London property – as shown by the Walkie-Talkie deal – shows no sign of abating. He also says Brexit uncertainty is causing some businesses to defer letting decisions.

That brings us to British Land, whose assets include the Broadgate centre in the City of London (LSE: CIN.L – news) , the Meadowhall shopping centre in Sheffield, Drake’s Circus in Plymouth, the Teesside Park centre outside Stockton and Fort Kinnaird in Edinburgh.

Like Land Secs, it too has had a busy six months, completing £32m worth of lettings covering 1.3 million square feet.

These included a 310,000 square foot lease to Dentsu Aegis Network, the Japanese owned ad-booking giant, at Regent’s Place in the West End of London – which it claims to be the biggest such lease of its kind in the West End in 20 years.

Like Land Secs and Great Portland, it too is reducing its borrowings, while it is also fighting shy of speculative developments until the fog created by the Brexit negotiations clears. However, its chief executive, Chris Grigg, has struck a decidedly more optimistic tone than his opposite number at Land Secs.

He said today, of the outlook: “Although the wider operating environment is uncertain, we are generating healthy leasing interest at good pricing across our portfolio, and prime capital values remain firm.”

So, while things are quite encouraging at present, there are certainly question marks about the direction of travel.

There is one more signal worth mentioning. The share prices of commercial property firms are a useful forward indicator. When they rise, it is usually a sign that the underlying asset values of property portfolios are set to increase. Unfortunately, here, the omens are not so good.

Source: Yahoo News UK

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Five ways to harvest sustainable UK income

Since the financial crisis, investors and savers have seen meagre yields from cash and gilts, with rates anchored at historic lows.

For investors accessing markets to extract additional income, it is more important than ever to navigate stretched valuations across many asset classes. Furthermore, investors must carefully consider the sustainability of income generated from equity and fixed interest investments.

Despite mounting doom and gloom over the UK economy, the outlook for dividends remains sound, recently buoyed by the rapid pound depreciation, which has benefitted overseas earners. Investors should remain wary of dividend concentration, but the UK will continue to be a strong and reliable long-term source of income.

Taking a long-term, value-driven approach, here are five income opportunities in equity and fixed interest markets:

Value opportunities in unrated gems

We have maintained a large exposure to unrated and subordinated debt, mostly in the form of preference shares and Permanent Interest Bearing Shares (PIBS). Just because these types of instruments don’t have a credit rating, does not make them low quality. There are plenty of companies which have taken the decision not to pay for a credit rating and are considered robust businesses – John Lewis a good example.

Which Isa platform should you chose? We compare the different brokers

Insurance company preference shares are a neglected and under-researched area of the market. It is permanent capital for these companies and can provide a rich seam of value and additional yield – for example Royal Sun Alliance, Aviva and General Accident.

Separating the casino from the utility in UK banks

We carried a large underweight to UK banks since the crisis. UK banks entered the financial crisis with very low capital ratios, found dubious ways of complying with Basel III requirements and were, by and large, an ethics-free zone. Furthermore, many banks continue to be encumbered with high-risk investment banking operations. When investing in banks, it is important to separate the casino from the utility.

A decade on, we have seen positive developments among some UK banks, in terms of restructuring and regulatory scrutiny. Following a period of close analysis, we recently took a position in Lloyds – our first domestic UK bank since the crisis. It is a relatively low-risk bank, with 95 per cent of its lending book exposed to the UK and a 25 per cent share of the UK’s current account market. Lloyds is also trading at a historic low – well under half of its pre-crisis share price.

Rock-solid insurance companies

Most of our financial exposure is in insurance, where solvency ratios have been rock solid.  While low interest rates are a drag on performance, we can expect this to turn into a tailwind when rates slowly lift. Strong names in this space include General Accident and Legal & General.

Strong real yields in commercial property

Commercial property also looks solid value. Since the crisis we have seen low levels of property development and vacancy levels remain close to record-low levels. Yields are a very robust 4.5-5 per cent, while rental growth remains positive driven by strong tenant demand. Property rents tend to keep pace with GDP growth over the long-term, so it can be argued this is a 4.5-5 per cent real yield. Picton Property and Londonmetric Property are great ways to gain exposure to this asset class.

Look to Asia’s growth engine

China looms large in the Asia region and for good reason – it is Asia’s growth engine. Every few years we hear a scare story about China – the currency devaluation being the latest – but its economy remains resilient.

10 high yielding shares in the FTSE 100: how safe are their dividends?

The service sector is faring well and consumer sentiment is strong. GDP growth of 6-8 per cent looks achievable to support a more balanced and transitioning economy. While the obvious cheapness has evaporated, Asia remains attractive on a relative global basis. We are currently invested in the region through HSBC, which earns most of its profits in Asia – as well as local companies such as dominant telecom China Mobile. Both yield more than 5 per cent.

Source: Money Observer