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Where can investors find recovery potential in property shares?

by Nikki Dale -

It’s been a tough year for some of the property market sectors, while others have been countercyclical performers and taken full advantage of the opportunities the pandemic has fast-tracked and presented them.

We have witnessed warehouse and industrial property owners and landlords ride the crest of the Covid wave, while construction site closures and eviction moratoriums have hit many house builders, property groups and commercial (and non-commercial) landlords hard in 2020.

Experts stand by their 2021 expected recovery in earnings

Analysts have cast expectations of recovery in earnings for the property sectors that have suffered a downturn during and due to the pandemic, and albeit lockdown #3 they are standing by them.

Over the next 24-months, data collected by FactSet – analysis of consensus earnings per share – forecasts compound rate growth is high for some companies.

If everything goes according to plan with the UK’s government vaccine roll-out, this will naturally bring increasing levels of normalisation and the house builders, real estate investment trusts (Reits) and property services groups that have suffered a shortfall, should start to see a recovery in earnings.

Student accommodation landlords coping and compensating in lockdown #3

Many of the larger student accommodation landlords suffered income losses last year when students returned home, either at the outbreak of the Coronavirus or as soon as restrictions were eased during the first lockdown.  The pandemic has also affected bookings for the academic year 2020/21 to some degree.

Student accommodation owner, manager and developer Unite Student has announced that it has now collected 91% of all rent to date for the 2020/2021 academic year.

“This reflects successful term one rent collection of 96% and a positive start to term two rent collection at 84% to date,” Unite said.  “The strong cash collection to date for term two means we retain headroom against all of our debt covenants, even after allowing for the maximum potential take-up of the seven-week rental discount.”

Unite Group PLC this week (03.02.2021) said it will extend its rental discount offered to students considering the latest lockdown measures enforced in the UK. Unite shares were down 3.1% at 954.50 pence each in London on Wednesday morning.

Unite Chief Executive Officer Richard Smith said: “Supporting students has been our priority throughout the Covid-19 pandemic, and we will continue to play our part during these exceptional circumstances. We recognise this is a challenging time for students, which is why we’ve extended our current 50% rent discount period.”

In the same sentiment, the London-focused student accommodation owner GCP Student Living PLC (LON:DIGS) whose share price has been steady since around mid-November 2020, said “Tenants can apply for up to 100% rental concession for a six-week period if they aren’t using their rooms in that period.”

Student landlords hope of high recovery  

Analysts forecast earnings to grow at the compound annual rate percentage below, over the next two years*.

Empiric Student Property (ESP) 37.4%
Unite (UTG) 36.7%
GDP Student Living (DIGS) 23%

 

Unite are forecast to be above its 2019 levels in 2 years – by 6%.

Unite do have an advantage over some, in that rent is set at a more affordable level that means it appeals to a greater proportion of the student market. Numis director of real estate research Robert Duncan said. “What that means is it’s not a massive gap if you suddenly see a reduction in international students,” he says. “You’re not going to have to massively discount your rates to attract more domestic students.”

Another good stability measure is nomination agreements with universities – whereby each year universities nominates a minimum number of students into the developers accommodation for an agreed period.  This is good for both parties, with the university’s commitment, rents are controlled and for Student accommodation landlords – like Unite who have majority of beds under nomination agreements – it gives greater transparency, with prediction on future revenue and portfolio valuation.

“A relatively fixed cost base means that any decline in occupancy has a material impact on earnings” adds Robert Duncan.

Housing market recovery expectations

Analysts forecast earnings to grow at the compound annual rate percentage below, over the next two years.

Bellway (BWY) 18.1%
Springfield Properties (SPR) 28.3%
Barratt Developments (BDEV) 16.9%
Persimmon (PSN) 6.4%

 

Home builder giant Persimmon (PSN) one of the UK’s largest new home builders wasn’t as affected in 2020 as some of the other groups, with earnings recovering from a higher base line.

Other property companies listed by DateSet on its two-year forecast include:

Savills 30.1%
St Modwen Properties 36.4%
Shaftesbury 20.9%
Derwent London 11.7%
Workspace 13.6%
Great Portland Estates 17%

 

Who are the pandemic property landlord winners? Will investment remain high in 2021?

Physical high street retail was struggling anyway with the yearly rise of its e-commerce opponents.  Due to the global pandemic the woes of retail have deepened, and e-commerce soared in 2020 as millions were pushed online to shop and supermarkets were forced to refocus on logistics.

READ ARTICLE: Retail-logistics property investment boom

There have been some pandemic casualties. Statutory earnings for retail and hospitality landlords, such as Hammerson (HMSO) were wiped out by heavy devaluations in its retail property portfolios.

However, even ignoring valuation movements, revenues for commercial landlords in retail, hospitality, restaurants and across other sectors have suffered with a rise in tenants going out of business and the governments eviction moratorium – non-payment of rent has caused rent collection levels to dip considerably.

Well-known retail landlords, such as aforementioned Hammerson, Land Securities and British Land have rents owed to them since the beginning of the pandemic but have only collected around half or three quarters of what is due.

With a high and rising demand for warehouse properties for storage and distribution centres to facilitate online orders.  Many traditional retailers are scrambling for new warehouse space.

Savills stated investment into distribution warehouses in 2020 was 25% up on 2019 – reaching £4.7bn.

READ ARTICLE: Warehouse Landlord Winners. Will investment remain high in 2021?

 

*DataSet for percentages listed.

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