Yahoo Finance Questor: this property fund's shift away from London means there's gains to be had
The stock market’s recent volatility provides a useful reminder of the importance of avoiding overvalued shares. Indeed, highly rated growth shares have been hit relatively hard by factors such as an increasingly hawkish monetary policy outlook and geopolitical uncertainty in Europe.
In Questor’s view, obtaining a margin of safety is crucial when buying any stock. After all, no investor knows exactly how the future will unfold or how company performance will react to evolving operating conditions.
Buying shares for less than they appear to be worth, which is what obtaining a margin of safety entails, is a simple but highly useful approach across all market conditions.
For example, real estate investment trust (Reit) Land Securities currently trades at a 22pc discount to its net asset value (NAV).
This suggests that investors are expecting a challenging future for the firm as it adapts to changing demand for commercial property that has been accelerated by the pandemic. It also indicates that they may be anticipating a further fall in its NAV after it declined by 18pc in the 2021 financial year.
However, the company’s latest half-year results showed a 2.9pc recovery in the value of its net assets as demand stabilised for the central London offices and broad-based retail units that have historically formed a major part of its portfolio.
This trend could continue as the UK economy further recovers following the pandemic. Indeed, the IMF forecasts that UK GDP will grow at an annualised rate of 3.5pc over the next two years as pandemic-related lockdown measures abate.
Moreover, Land Securities is implementing a major strategy change that positions it for long-term growth. It will focus to a far lesser extent on central London office space in expectation of changed working habits following the pandemic. It also plans to dispose of hotels and regional retail parks that offer relatively unfavourable growth outlooks.
Instead, it will invest in mixed-use developments that include residential, retail and leisure property. In addition, it expects to increase exposure to the flexible office segment. It also plans to invest in major retail and leisure destinations that could maintain their consumer appeal in an increasingly multichannel-focused retail industry.
As part of its plans, the firm has sold £880m of assets since September 2020 and expects to dispose of a further £1.7bn of London offices. Encouragingly, its yield on disposals has been around 4.5pc versus a target development yield on cost of 5.5pc-7pc for its pipeline of investments.
And, with many of its projects providing optionality, it has the flexibility to adapt the scale and nature of its investments to a changing outlook for commercial property that is currently difficult to accurately forecast.
In Questor’s view, the company’s financial position suggests it has the capacity to deliver on its revised strategy. For example, the company has a debt-to-equity ratio of around 48pc and a loan-to-value (LTV) ratio of under 32pc.
The latter figure is easily within its target range of 25pc-40pc, which was reduced in response to the uncertain operating conditions prompted by the pandemic.
Meanwhile, Land Securities expects its dividend cover to revert to 1.2 times earnings in the current financial year. A forward dividend yield of 4.5pc highlights its income potential in an era where interest rates are likely to remain at historically low levels, despite tighter monetary policy.
Of course, the firm’s shares have generated a disappointing return since we tipped them as a “buy” in June 2018. Since then, they have declined by 15pc and underperformed the FTSE 100 by 14pc. However, Land Securities has contended with major challenges including Brexit and the pandemic during that time.
Now, the firm’s solid financial position, sound long-term growth strategy and an improving economic outlook could catalyse its share price. Moreover, its wide margin of safety could hold significant appeal for investors at a time when rising uncertainty is prompting a shift from highly rated growth shares to value stocks.
Questor says: buy
Ticker: LAND
Share price at close: 795.4p
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