M&G Investments is optimistic about the 2023 prospects of two JSE-listed property companies operating in Europe, Hammerson and Sirius Real Estate.
Hammerson owns premium retail assets in the UK, France and Ireland. In the past five years the company has survived a retail property apocalypse of online retailers eating into market share, department stores going bust and the pandemic-induced lockdowns negatively affecting operations.
Sirius is the leading owner and operator of branded business and industrial parks providing conventional space and flexible workspace in Germany and the UK.
“The two companies have different drivers and risk-reward dynamics to their investment cases, and therefore can generate alpha independently,” said Rahgib Davids, equity analyst at M&G Investments, adding that there is merit to owning both stocks.
M&G Investments ranked Hammerson and Sirius, along with Capital & Counties and Industrials Reit — the companies with dual listings on the London and Johannesburg stock exchanges — as well as JSE-listed Lighthouse Capital as the losers in their stock picks for 2022, recording losses of as much as 41%.
In 2022, UK and European property was hardest hit by rising inflation and interest rates rising from 0% to 3%. This meant investors needed lower property prices to make the same deals profitable. Share prices were also declining, reflecting market expectations that property values would fall, according to Davids.
“We believe the broad-brushed derating across the UK and Euro property sector is somewhat overdone, and we see opportunities in certain stocks we think will prove more resilient than what is implied by their depressed valuations,” he said.
A destruction in property values and rental income saw the company resort to a rights issue and substantial asset disposals, resulting in a stable business.
Improved sentiment around inflation and interest rates has seen Hammerson re-rate by 52% from the lows of October 2022 when the share price reached R3.66. At the close of trade on Wednesday, Hammerson had lost 0.54% to R5.52.
Davids said the execution of strategic asset disposals has the potential to unlock significant value by further de-risking the balance sheet and improving earnings by selling lower yielding assets to settle expensive debt.
Hammerson has three major shareholders, including Lighthouse Capital, Resilient Reit and the Dutch Pension Fund, all seeking value unlock from their collective 45% stake.
“There is still more value on offer as Hammerson is expected to resume cash dividends that could provide shareholders with a yield of about 7% in sterling,” said Davids.
For the interim period ended June 30 2022, Hammerson said post-pandemic footfall, retail sales and rental collections continued to recover, closing on or above 2019 levels in some of its core assets.
Sirius offers a decent euro dividend yield, good growth prospects and re-rating potential if the market gains certainty over inflation and interest rates.
“The company trades on a 9% euro earnings yield, and 10% discount to book value, which we believe is an attractive entry point for a high-quality business capable of delivering both organic and inorganic growth,” Davids said.
He said Sirius is a rare find in their property stock universe. What makes this company special is that it is not a real estate investment trust (Reit) and retains 35% of earnings to fund capex and expansions that produce returns far above their cost to capital.
“Its in-force rents are low relative to alternative properties and present very good value for tenants, which provides scope for inflationary rental increases.”
CEO Andrew Coombs told Business Day that with fears of recession in the UK and Germany receding as growth figures exceed expectations mainly due to falling energy prices and low unemployment, they are confident about the 2023 prospects in both markets.
“We believe demand for industrial and office space in Germany and the UK will be robust — this as industrial property continues to benefit from long-term macro trends and a steady return to the office continues globally,” said Coombs.
At the close of trade on Wednesday, Sirius’s share price had gained 0.63% to R17.59.
Davids said certainty around inflation and interest rates would be positive for property stock performance. “This has been pre-empted by equity markets that rallied in the first two weeks of January when US inflation slowed, spurring hopes that the interest rate hiking cycle is tapering off.”
In the UK and Europe the high cost of living and food and energy price inflation will reduce consumer discretionary spending, thus affecting the retail property sector, he said. Prime office assets with strong sustainability metrics are benefiting from high demand from corporates who are required by regulation to lease and occupy offices with Environmental Performance Certificate ratings.
“Demand for logistics properties continues to exceed supply resulting in all-time low vacancies that help ensure robust rental growth prospects.”
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