Liberty International - more than just a rand hedge

Posted On Wednesday, 11 June 2003 02:00 Published by eProp Commercial Property News
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THE surge in UK property giant Liberty International’s share price (both in SA and the UK) since the beginning of May has caught the market by surprise, especially as latest indications are that the UK spending boom is slowing.

Property-Housing-ResidentialThe UK pence price has risen 10% and the SA rand price 28% in this period. As a result, analysts expect little further upside in the SA share price in the short term, unless there is significant weakness in the rand/pound exchange rate.

As the exchange rate and the UK pence price are key factors in determining the SA share price, the question is whether investors should regard Liberty International as a pure currency play.
In the light of the rand’s current volatility, it may be wise for investors to focus on other reasons to buy the share, of which there seem plenty.

Apart from geographical and asset class diversification, the most important criterion for investors should probably be the quality of the company’s underlying assets. Liberty International owns commercial properties (including six of the UK’s top 15 shopping centres) valued at R59bn (£4,5 bn).

With a market cap of close to R27bn, it is one of the largest companies on the JSE Securities Exchange SA, even larger than companies like Sanlam and Harmony.
The company has over the past 30 years built up one of the single largest retail portfolios in the
UK and has some of Europe’s largest shopping centres in its stable. These include the MetroCentre at Gateshead in Newcastle, Lakeside at Thurrock, on the outskirts of London, and Braehead in Glasgow.

Unlike in SA, where new shopping centres are continuously added to the market, new property players in the UK face huge entry barriers. As Liberty International CE David Fischel points out: “Everyone wants to get into the UK retail market. But government’s regulatory restrictions on new developments make it impossible to replace a portfolio such as ours.”

UK legislation makes it difficult to obtain planning consent to put up new shopping centres in out-of-town areas. Even existing centres battle to obtain approval to extend floor space. For instance, it took Liberty International six years to obtain consent to add
35000 sq m to its MetroCentre – soon to be Europe’s largest covered shopping centre.
This frustrates retail developers but it also benefits existing property owners such as Liberty International as it boosts the rarity value of their portfolio considerably. Also, as long as the supply side remains limited and the demand for retail space continues, rental growth should follow.

Fischel says few new retail developments are set to come onto the market in the next three to four years, which should favour rental increases. And as he points out: rental growth equals share price growth.

But investors may be concerned about the downward trend in UK retail sales growth and how this will affect demand for retail space and rental reviews. The latest official figures show that consumer spending in the UK was up only 0,4% in the three months to end March (y-o-y). This represents the lowest growth in six years.

Fischel believes the slower growth in retail sales is merely a downward correction on the back of unusually strong growth over the last few years. He stresses that consumer spend is still growing, albeit at a slower pace. “So talk of a boom-and-bust scenario is nonsense.”

One must also keep in mind that shopping is a favourite pastime in the UK and it is unlikely that UK consumers will change their spending patterns overnight. But if disposable income does come under pressure, consumers will probably favour large, regional centres where they can do comparative shopping, says Fischel.

Analysts agree that the risks in terms of Liberty International’s resilience in a softer consumer market are minimal. HSBC analyst Leon Allison says the soundness of Liberty International’s property portfolio exceeds that of any of the listed SA property stocks.

“`The quality of its portfolio is reflected in 80% of leases extending to 2007 and beyond, as well as a minimal vacancy of 1%. This compares to SA property stocks with an average of only 25% of leases extending to 2007 and beyond and average vacancies of 8%.”

Allison says the largest risk lies in the possibility of a wave of tenant failures in a serious economic downturn. But the problem would be more serious for new developments than for existing, mature centres.

There is also the risk of making a substantial investment in a major new complex and then not being able to fill it with tenants. This risk is, however, largely addressed by management’s policy of not starting on a new project before a sufficient amount of the floor space is pre-let.

In this regard, Liberty International is planning to add three new shopping centres to its existing UK portfolio over the next eight years. This represents capital expenditure of some £900m (R11,8bn) and will bring the UK regional centre portfolio to 12.

Another positive is that Liberty International has very little exposure to the depressed office sector, with only 10% of its portfolio consisting of office space in central London. Retail has recently outperformed other sectors of the UK commercial property market, with a total return of 14% in 2002 compared with 11% for industrial property and only 3% for offices (Investment Property Databank figures).

SCMB Securities analyst Len van Niekerk shares the view that Liberty International’s portfolio of prime retail property should help to protect it from a slower economy and tougher retail conditions. “But should poor conditions persist for long enough, it will feel the pinch in its diminished ability to negotiate increased rentals.”

As for the recent uptick in Liberty International’s share price (as well as that of most UK real estate stocks), analysts reckon there is no real justification for the rally given the current state of the UK consumer market, except that property yields are now more attractive than those of bonds.

But Fischel says the recent share price could be linked to the inclusion of the company in the MSCI World Index from this month, with investors buying ahead of the MSCI listing.
A number of UK-listed property companies have been reporting in recent weeks, which could also have boosted activity in the real estate sector in general.

Van Niekerk has in the meantime downgraded Liberty International and expects the SA share to underperform the all-share index in the next 12 months, with a forecast total return of 6,5% (compared to 25% for the Alsi). However, Liberty’s fundamentals remain sound and it is still a long-term buy for its respectable rand returns (about 20% per annum), low business risk and rand-hedge properties, says Van Niekerk.

In spite of the recent share price gains, Liberty International is still undervalued, trading at a discount of 26% to its NAV. This does tend to make it a better buy than many local property stocks, which are mostly trading at a premium to their NAV.

Liberty International has managed to increase its dividend five-fold in the past 17 years, showing dividend growth in 16 of the 17 years. Analysts expect the dividend to continue growing by between 4% to 5% per annum over the next three years.

Last modified on Thursday, 08 May 2014 19:33

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