Ritchie warns on valuations in UK capital

Ritchie warns on valuations in UK capital

UK commercial property and related stocks’ steep valuations, especially in London, have spurred Aberdeen’s Pan-European equity team to switch to a more cautious stance.

After enduring severe losses during the financial crisis, property has rallied spectacularly in the past five years.

While the FTSE 100 has increased by 16 per cent in the five years to September 7, UK real estate indices have posted returns in excess of 100 per cent.

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For its part, the £401m Aberdeen Property Share fund, which invests exclusively in the equities of property companies, has achieved a total return of 110 per cent for the period.

But according to the fund house’s Pan-European equity team that manages the vehicle, valuations are looking stretched after such a strong run.

Ben Ritchie, co-lead manager on the fund, said: “It is very easy to think from a London perspective that the environment is booming. But the risk to my mind is around valuations as they ultimately drive returns, and the higher they are the more cautious we are.”

The post-crisis euphoria in the capital, where foreign investment has been a major driver, has pushed prices up and yields down to the point where Mr Ritchie thinks they are “concerning”.

“On the back of rising interest rates, yields could be quite vulnerable”, he said.

“We seek out companies that are looking at the potential to develop properties – to buy assets on attractive yields. Right now central London feels pretty full in terms of valuations. But where we are seeing value is in the regional markets – in contrast, they have some way to go.”

It is in this sector where the Aberdeen team has significantly upped its exposure.

The vehicle has 81 per cent of its assets invested in UK-listed firms. But the split between London – where it has investments in groups such as West End specialist Shaftesbury – and the regions is now about 50:50.

The capital previously accounted for around 60 per cent of holdings.

The fund has the ability to invest up to 20 per cent overseas. In spite of the challenges facing Europe, Mr Ritchie said the continent had held rich pickings in recent years.

“In Europe, there is a polarisation between super-prime, which has done really well, and the rest of the market,” he said.

For example, the fund’s top holding at 6.3 per cent is French group Unibail-Rodamco, which specialises in shopping centres in European capital cities.

“The group is focused on the super-prime end of the market and cash generation,” he said.

“The way it runs its malls is quite impressive. Demand for units in the best centres has been increasing and the firm has managed to increase rents in Spanish centres throughout the crisis.”