Capital & Counties Properties share still offers value

Posted On Friday, 24 January 2014 16:03 Published by
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Capital & Counties Properties may well have appeared fully priced after the stock had more than doubled in the previous two years, but it continues to defy gravity.

Ian HawksworthA year ago, Capital & Counties Properties (Capco) may well have appeared fully priced after the stock had more than doubled in the previous two years. But the owner of London landmark Covent Garden continues to defy gravity.

Dual-listed Capco (JSE and London Stock Exchange) rallied around 70% in 2013. Over the past two weeks alone, the JSE share price was up another 10%, no doubt on the back of investors' increased flight into rand-hedge stocks. That means South Africans who held on to their Capco shares when the former Liberty International demerged on May 10 2010 have seen the value of their investment surge by a substantial 380%.

At the time of the unbundling many were sceptical about whether it was the right move to split Liberty International's portfolio into two. A number of fund managers subsequently climbed out of the London-focused development play and instead placed their money on the group's income paying shopping centre arm, now known as Intu Properties. But Capco has since proved to be the more lucrative bet of the two. Coronation Fund Managers property analyst Anton de Goede says last year's run in Capco's JSE share price is partly related to a weak rand, as the sterling share price was up less than 40% in 2013. However, the stock has also been supported by money flow into London based real estate assets.

De Goede says large institutional investors, particularly from China, have entered London's commercial property market in a big way since their offshore investment allocations were increased. "A recovery in the residential property market — London house prices were up around 10% in 2013 — has also boosted sentiment, given Capco's exposure to the housing market through its future development pipeline at Earls Court, Capco's other flagship property." 

So is there further upside left or have new investors missed the boat? De Goede expects management to continue to create value for shareholders at both the trendy mixed-use precinct Covent Garden and Earls Court, albeit at a slower pace than over the past three years. "Future growth will be driven primarily by rental growth opportunities at Covent Garden and potential land value increases at Earls Court as Capco starts to roll out its development master plan for the district," says De Goede.

Plans to turn Capco's Earls Court, one of the largest tracts of land left in central London, into an entirely new district that will include about 8000 apartments and two high street shopping nodes are well advanced. Capco is expected to launch the first residential phase at Earls Court, a stone's throw from wealthy neighbourhoods like Chelsea, within the next six months. Alternative Real Estate analyst Maurice Shapiro says though Capco is now trading at a sizeable premium to net asset value, the market is not yet fully appreciating the rental growth potential and future land value uplift offered at the two estates.

The rand-hedge factor is also likely to continue to support the share price, says Shapiro. "We also like the fact Capco is not a yield play, so the company is less exposed to interest rate movements than other property stocks." Capco CE Ian Hawksworth said on a recent visit to SA that the amount of capital chasing trophy property assets in London was unprecedented. He noted that the company was in a favourable position in that it owned two prime estates in the city that both offered "significant" growth potential. Meanwhile, Capco's strategy to attract more contemporary, luxury brands to Covent Garden continues to pay off.

Chanel recently chose the precinct to open its first standalone cosmetics store in the UK, and Dior will soon follow suit. Hawksworth says the once shabby Covent Garden has emerged as "the place to be" in the minds of retailers and consumers. "We have gone from Tshirt and takeaway shops to Chanel and Dior within three years."  However, average rentals at the £1,1bn precinct are still around half of those of comparable shopping streets in other parts of central London, which Hawksworth says suggests Covent Garden has plenty of rental catch-up to do.

Capco got the go-ahead in December for a new development phase at Covent Garden that comprises 45 apartments, eight retail units and two restaurants. Work is likely to kick off in June.

Last modified on Friday, 24 January 2014 16:55

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