With this in mind, and within our property allocation, which at present represents around 12 per cent of our net asset value, we have been active.
We have reduced names that have got a little ahead of themselves from a valuation perspective, allocating the proceeds to names that remain out of favour and trade on very material discounts to their intrinsic value, while generating a healthy and very competitive yield.
One such name that has been reduced is that of Phoenix Spree Deutschland, a Berlin-focused real estate investment company (REIT).
There is no question, it has been a wonderful contributor towards our portfolio's performance, but one must never become emotional about such decisions.
The share price of Phoenix Spree has appreciated over 100 per cent in two years, which is understandable. The underlying Berlin-focused property portfolio has performed wonderfully well.
The negativity surrounding the UK economy, and in particular the UK property market, appears to be firmly priced in.The guidance we have been given by the company is that the portfolio continued to perform strongly in 2017, with a total appreciation of 43.8 per cent based on an independent valuation.
Working off the December 2016 valuation, a rough calculation would expect the end of year net asset value (NAV) to come in at around €3.92, or £3.45 in sterling terms. The company expects to report towards the end of April 2018.
This places the current share price of 350p at around ‘par’, thus trading close to its NAV.
This rather full looking valuation may indeed prove to be good value should the German property market continue to be a hot sector, but in isolation, it appears that much of the good news and
positive sentiment towards this sub-sector is now in the price.
At the other end of the valuation spectrum, there are the likes of Land Securities, British Land and Hammerson.
They are not in the same sub-sector as Phoenix Spree, with little or no exposure to residential property, and certainly in the case of Land Securities and British Land, focused on the UK market.
Hammerson is more diverse from a geographical perspective.
So we are not trying to compare like for like here within our property portfolio, rather, pursuing opportunities presented by their valuation.
From close of business on 23 June 2016, the day of the referendum on EU membership, to the 27 June 2016 (just two trading days), Land Securities fell 24 per cent, British Land was down 28 per cent and Hammerson 21 per cent.
At the time of writing, all three remain at or below that 23 June level, a symptom largely of the ‘Brexit’ cloud that hangs over domestically exposed stocks.
Despite the price falls witnessed by these companies, their net asset values have been remarkably robust (with both Land Securities and British Land selling trophy assets above carrying valuation),
therefore the ‘discount’ to NAV has opened up to very attractive levels.
Accordingly, Land Securities has a price to book ratio of 0.64, British Land 0.70 and Hammerson 0.71 with yields of 4.3 per cent, 4.7 per cent and 4.9 per cent respectively.
Just the other week, Hammerson rebuked a takeover approach by Klépierre, the largest mall operator in Europe, which had recognised the value in the Hammerson shares. Albeit it was an approach
dismissed by the board of Hammerson, calling it "wholly inadequate" and "opportunistic", it did go some way to re-energising the sector that has for too long been hugely out of favour.
The negativity surrounding the UK economy, and in particular the UK property market, appears to be firmly priced in.
Therefore we believe that there is a strong case to argue for the UK real estate market offering strong upside from here - on the basis that we do not witness a near Armageddon Brexit scenario.
It is a sector we see tremendous value in, and perversely perhaps, one doesn’t have to be particularly bullish on UK bricks and mortar to get excited about the pricing of such companies.
James Sullivan is managing director of Miton Optimal
