According to City analysts, real estate stocks, which have traditionally been considered a safe haven, are now in bubble territory.
Real estate investment trusts, such asBritish Land (LSE: BLND),Intu (LSE: INTU)Hammerson (LSE: HMSO) andLand Securities (LSE: LAND) have put in an impressive performance during the past five years.
A combination of investors search for yield, rising UK property prices and easy credit have all worked in favour of REITs. Over the past five years, British Land, LandSecurities, and Hammerson have outperformed the wider FTSE 100 by 66%, 57% and 91% respectively, excluding dividends.
Intuis the laggard of the group. The company has underperformed the FTSE 100 by 19% since August 2010.
Nevertheless, one group of City analysts now believes that its time for investors to book gains in the REIT sector. Specifically, analysts believe that commercial and residential property prices are in bubble territory again, after years of growth fuelled by loose money, low inflation and lots of cheapcredit.
Whats more, there are signs that property investors are starting to cash out of the market, booking gains made since the end of the financial crisis. Rising interest rates are only likely to lead to an acceleration of this trend.
Moreover, REITs are no longer an attractive way to play the property market. For example, Land Securities, British Land and Hammerson all trade at net asset values and offer a dividend yield thats currently below the market average.
Crunching numbers
British Land is one of the UKs largest REITs, and its also one of the cheapest. At the end of 2014, the companys net asset value came in at 829p per share, so at present levels the company is trading at a slight discount to NAV.
Still, if the commercial property market is about to take a tumble, British Lands NAV will fall in line with the wider market. The companys dividend yield stands at 3.5%, slightly below the FTSE 100 average of 3.6%.
Land Securities dividend yield stands at a lowly 2.6%, and the companys adjusted NAV was reported as being 1,293p at the end of 2014. Investors have been prepared to pay a premium for Land Securities shares due to the companys exposure to the London property market. But withquantitative easing coming to an end, Land Securities is facing the prospect ofrising costs of capital and moderating asset returns.
Hammerson reporteda NAVof 638p at the end of 2014, so once again the company is trading at a slight discount to NAV. Nonetheless, Hammersons dividend yield of 3.3% leaves a lot to be desired, and there are better opportunities out there.
Intuhas underperformed the FTSE 100 over the past five years for good reason. The company has a high level of debt and has failed to create any value for shareholders during the past six years. Since 2009,Intusbook value per share has not exceeded 360p, while shareholder equity has increased 140%.
It seems as if the company is diluting existing shareholders to achieve growth. Also,Intusgross gearing around 99% and the companys interest payments are only covered one-and-a-half times by operating income.
Plenty ofopportunities
The dividend yields of British Land,Intu,Hammerson and Land Securities leave a lot to be desired and there are plenty of other dividend champions out there.
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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.