The UK property market has experienced an uncertain period of late. Since the EU referendum in particular, doubts have emerged regarding valuations and the potential for capital growth in future. While Brexit is a clear risk to UK property prices and to the wider UK economy, the property sector does still appear to offer a wide margin of safety at the present time. As such, buying high-quality property stocks, such as the following two shares, could prove to be a shrewd move.
Reporting on Tuesday was Real Estate Investment Trust (REIT) Shaftesbury (LSE: SHB). It reported impressive performance from its 14.5 acre property portfolio in London’s West End, with good trading and footfall across all of its locations. This has driven a high level of occupier demand, with rental growth and low vacancy rates. This has helped boost its portfolio valuation by 2%, while investment in its asset base of £48.1m could help to build stronger growth in the long run.
Despite its upbeat performance in the first half of the year, Shaftesbury continues to offer a relatively cheap valuation. It trades on a price-to-book (P/B) ratio of only 1.1, which suggests its shares are undervalued at the present time. Therefore, after a five-year gain of 87%, its share price could continue to outperform the FTSE 100 in future years.
Certainly, the impact of Brexit could be somewhat negative on its financial performance. Uncertainty about the terms of the deal may lead to a lack of consumer confidence and spending even in London’s West End. However, with a low valuation and an excellent asset base, now could prove to be the right time to buy Shaftesbury.
Also offering an attractive risk/reward ratio at the present time is property investment and development company, Londonmetric (LSE: LMP). It is forecast to deliver positive earnings growth in the next two years, and yet its shares continue to trade on a relatively low valuation. For example, they have a P/B ratio of 1.3. Given the company’s development pipeline and diversity, this seems to be relatively attractive.
Londonmetric also has income appeal for the long term. It currently yields 4.5% and is forecast to grow dividends per share at an annualised rate of almost 4% during the next two years. This means that even if inflation moves higher than its current level of 2.7%, the company should be able to beat inflation in terms of its yield and dividend growth outlook. As such, it could become a relatively popular income play over the medium term.
As with Shaftesbury, Londonmetric faces an uncertain future due in part to Brexit and the prospect of declining consumer spending. This could hurt investor confidence in the sector as a whole. However, with a wide margin of safety and a high-quality asset base, it could prove to be a profitable buy for the long term.
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Peter Stephens has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.