Shareholders exit British Land LandSec as valuations stretch

If the commercial side of the property sector can be seen as leading indicator for the rest, recent share price moves by leading UK landlords […]

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By :  ,  Financial Analyst

If the commercial side of the property sector can be seen as leading indicator for the rest, recent share price moves by leading UK landlords and developers may be worth keeping an eye on.

Shares of British Land, Hammerson, Intu Properties, and Land Securities, were clustered among the worst-performing FTSE 100 fallers on Wednesday.

What seems to have ‘turned the herd’ on the group was recent publication of a number bearish brokerage notes.

It may also be significant that the FTSE 100 has in recent sessions been incrementally making its strongest attempt yet to match its highest-ever closing peak—6957.59.

Since that’s happening on poor momentum, sectors with high valuations and conspicuous winning streaks are being scrutinised closely.

Enter London-listed commercial real estate groups, most of whom are incorporated in the form of Real Estate Investment Trusts.

The largest include Hammerson, one of the UK’s preeminent developers and lessors, whose shares gained about 20% over the last 52 weeks, shopping centre specialist Intu, up 28% in 12 months, and the dominant office developers British Land and Land Securities, both of whose shares are still between 39%-to-45% higher than in February 2013, even after a pullback by the group that started earlier this month.



Cycle peaks for BLND, LandSec?

The latter two, widely regarded as sector bellwethers, have released excellent core results.

BLND reported in its interim report late in January, asset sales of over £900m (including residential) and 269,000 square feet of retail or investment lettings or renewals, 10.9% above the sector’s Estimated Retail Value (ERV) benchmark.

That came after the firm posted a 12% climb in European Public Real Estate Association NAV (Net Asset Value) in the six months to 30th September.

Its largest UK rival, Land Securities, also reported a firm half-yearly result, with a 20% rise in first-half adjusted NAV.

This momentum continued, with sales of £701.6m during the quarter reported in January 2015, bringing the nine-month total to £886.4m.

Sales for the nine months to 31st December were 15% ahead of the March 2014 valuation.


The Elephant of Threadneedle St.

However, a major ‘elephant in the room’ in this scenario is that it’s well-known much of the UK’s economic recovery, and certainly its property development boom, have been at least partly fuelled by several years of historically low Bank of England interest rates.

As the economic rebound has picked up, so too have signals from monetary policy makers that these interest rates may have to be raised sooner or later.

“We don’t see any imminent hike of interest rates,” British Land chief executive Chris Grigg told the Reuters news agency in November.

Broadly speaking, his judgement was, and is, correct.

However, there were clear hawkish undertones from The Bank of England and its Governor Mark Carney last week, even though the BOE reported in its quarterly report that inflation fell below the bank’s 2.0% target.

At the same time the BoE upgraded inflation and Gross Domestic Product growth forecasts, raising them to 1.96% in 2 years from 1.8% and to 2.15% in 3 years from 1.95%, respectively.

The Short Sterling market seems to be pricing in a move by the Bank early next year.

Ample time to reassess holdings.



Big Property finding it tougher to pass muster

It’s clear the market is looking askance at BLND and LandSec due to a combination of their size, scale (and hence implied hurdles to near-term growth) plus valuations being too punchy, as well as not punchy enough.

Shares of smaller rivals are not being hit as severely.

These include Shaftesbury Plc. and Derwent, with price/earnings ratios forecast at 58 and 56 times their earnings a year from now respectively, and even 69 times for Great Portland Estates.

These all traded between 0.3% to 1% lower.

British Land and Land Securities, trading on 27 and 30 times next year’s earnings respectively, out of kilter with the FTSE 100’s current 19.85 sent their shares as much as 2.8% and 2.3% off.

Intu, trading on 26 times 2016 earnings and the No.3 UK commercial developer closed 3.3% lower.




Momentum bounces

Despite the longer-term investment outlook for the sector’s giants, shorter-term traders will note some intrinsic exhaustion of the bearish scenario for the time being.

In BLND’s case, the chart of its Daily Funded Trade within City Index, with a Stochastic-based trading system attached showed selling breached the prescribed limits of the system this morning, triggering a long-entry signal.

The system’s moving averages subsequently surged to the other extent today and an exit from longs was triggered.

Finally, since the Slow Stochastic Oscillator Reversal Cross System follows stochastic principles strictly—long entry signals are only triggered when the slower MA line (in blue) crosses above the faster yellow line, whilst both are in oversold territory–a long entry signal was emitted early in the afternoon.

In conjunction with the attached MACD system, currently indicating bearish momentum predominates, the chances of yet another reversal early in Thursday’s session look good.



Taking another volatile name today in this sector, Intu Properties Plc. DFT, we see another very short-term trading buy was triggered, but the marginal nature of the MAs’ rises meant advice to exit followed soon after.

Again both MAs are nominally oversold, with a long-entry signal only precluded by the strict logic of this simple algo.




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