London Office Developers Offer Best Investment Outlook, Scots Managers Say
Scotland’s real estate fund managers are increasing stakes in central London property developers Derwent London Plc and Great Portland Estates Plc, betting they’ll benefit from a shortage of modern office space.
Managers at Scottish Widows Investment Partnership and Standard Life Investments, both based in Edinburgh, have bought more shares in Derwent London and Great Portland, two of the three best-performing U.K. real estate investment trusts this year. Aberdeen Asset Management Plc, Scotland’s biggest fund company, has also lifted its weighting in the two developers.
“We are very bullish about the central London office market,” said Andrew Jackson, head of real estate strategy at Standard Life Investments, the fund unit of Scotland’s biggest insurer. “Great Portland and Derwent have assets that will let well and will see a big accretion to their asset value.”
Derwent, Great Portland and Shaftesbury Plc, all based in the U.K. capital, focus on London’s West End, which has the world’s highest office rents, according to CB Richard Ellis Group Inc. Returns on central London offices in the first four months of 2010 were more than double those in the rest of the city’s office market, CBRE said.
“I am pretty much neutral on the U.K., but with Derwent and Great Portland we have taken a firm view that we like those stocks, which are outperforming the market as a whole,” said Vicky Watson, 34, who oversees the SWIP European Real Estate fund from Edinburgh.
Jackson said he’s concerned the benefit Shaftesbury had gained from the weakness of the pound attracting overseas visitors to its shops would come to an end for the next few years.
Prospects for U.K. REITs, whose shares are little changed in the past 10 months, depend on the state of the economy, said Watson, whose biggest holding is Paris-based Unibail-Rodamco SA, Europe’s largest REIT.
“There is so much hanging on the wider picture,” she said. “We need a lot more macro data coming through to be sure the recovery is under way.”
That view is shared by Ben Ritchie, a senior investment manager at Aberdeen Asset Management. Though Ritchie hasn’t added to his holdings in Derwent London or Great Portland in 2010, they now make up a larger weighting in the Aberdeen Property Share Fund because of their superior performance.
“London and the West End is the place to get as much of our money invested as we can,” Ritchie said. “London has always been a strong long-term performer and is the part of the U.K. economy that will do well in the next decade.”
Among the largest REITs, he favors Land Securities Group Plc of London because of its London-focused development programs. Ritchie aims to generate returns from house builders including Berkeley Group Holdings Plc of Cobham, England, and York-based Persimmon Plc, as well as smaller developers such as Helical Bar Plc and Development Securities Plc.
Land Securities has the largest development pipeline in London, Chief Executive Francis Salway said May 19. It has 1.2 million square feet (111,500 square meters) of offices and retail properties under construction in the capital.
“There are a lot of speed bumps to get over in the macro world, but it is not all doom and gloom,” said Ritchie, 29.
Standard Life’s Select Property Fund, which owns stocks as well as offices and retail properties, and its Global REIT Focus Fund have been cutting holdings in the largest U.K. REITs, Jackson said.
‘Not Terribly Excited’
“We are not terribly excited about the big REITs,” he said.
The money manager prefers smaller companies including Helical Bar, LXB Retail Properties Plc and Minerva Plc, which has two London offices under development at a time when there is a shortage of new space.
Both Jackson and Watson say U.K. REITs will focus more on asset management in the next few years.
“They cannot, and will not, develop as much as they have in the past,” said Jackson, 41. “They were designed to give property exposure, not property development. We will see them increase dividend payouts and reduce gearing.”
The average dividend yield for REITs in Britain is 3.4 percent, compared with 3.3 percent for the U.K.’s FTSE All-Share Index, according to Watson’s research. In the rest of Europe, the average REIT yield of 4.8 percent exceeds the average 2.7 percent for the market as a whole.
The U.K. real estate companies that converted to REITs when the system was introduced at the peak of the property market in January 2007 haven’t yet adopted the conservative strategies of REITs in more mature markets, Watson said.
“In some ways, they are not REITs yet,” she said. “REITs on the continent are very dull. They are more entrepreneurial in the U.K, they are more creative, but that is not exactly what REITs are about.”
Outside the U.K., Watson favors Stockholm offices and is investing more in the Swedish landlords Hufvudstaden AB and Castellum AB. Overall, she has relatively more money invested in France than anywhere else in Europe. That partly reflects her preference for Corio NV and Eurocommercial Properties NV, two Dutch companies that own malls in France, and her stake in Unibail-Rodamco.
Jackson also has holdings in Unibail-Rodamco and Eurocommercial. In general, Standard Life Investments doesn’t favor southern European real estate companies, he said, singling out Spain and Italy as places to avoid.
“The quality of stocks is pretty poor and corporate governance is particularly poor,” he said.
Aberdeen’s Ritchie regards Unibail-Rodamco as “pretty cheap” and sees companies such as Silic, which owns business parks in the Paris region, as low-risk. He is considering investing in Scandinavia, he said.