The outlook for the UK property sector is highly uncertain. Todays half-year results from FTSE 250 investment company CLS (LSE: CLI) provide an indication of how the future will develop, and whether its a better buy than property-focused companies Tritax Big Box (LSE: BBOX) and Purplebricks (LSE: PURP).
CLSs first half was positive. Net assets per share increased by 7.8% and earnings per share rose by 92% to 80.5p. This allowed it to increase distributions to shareholders by 10%, with a proposed 7.2m tender buyback of one in 95 shares.
The vacancy rate at CLSs properties remains low at 3.7%. Its interest cover continues to be high at 3.6 times, while it has been able to reduce the weighted average cost of debt by 0.13% to 3.27%. This will provide it with greater headroom when making debt repayments and provides additional financial security.
One of the reasons for CLSs strong performance in recent months has been its exposure to non-UK markets. In fact, 37% of its business is conducted in Germany and France, which provides it with significant diversification and reduced risk. Furthermore, CLS derives 52% of its UK income from central government and it believes that this will help to protect it against the effects of Brexit.
Brexit risk
On this topic, Brexit poses a major risk to all property companies thatrely on the UK for a significant proportion of their income. The outlook for the UK property industry is the most uncertain since the credit crunch and this could cause investor sentiment towards CLS as well as other property stocks such as real estate investment trust (REIT) Tritax Big Box and estate agent Purplebricks to fall.
The Bank of England expects unemployment to rise by 250,000, the UK GDP growth rate to fall to 0.8% in 2017 and has stated that house prices will fall. This wouldsuppressactivity in the housing market, since sellers wouldntt wish to sell at a lower price and buyers wouldwait for a lower price. As such, the volume of transactions is likely tofall and cause Purplebricks sales to come under pressure. The effects of this lack of activity wouldbe exacerbated in Purplebricks case since its a low cost/high volume operator and so requires a significant amount of demand to turn a profit. As a result, its shares lack appeal right now.
Clearly, Tritax Big Box is somewhat shielded from the effects of Brexit because of its focus on large logistics facilities. They tend to be relatively stable and robust assets to hold during a period of difficulty. However, this stability appears to be adequately priced-in to Tritax Big Boxs valuation. It trades on a price-to-earnings (P/E) ratio of 17.1, which is higher than CLSs P/E ratio of 15.6. This indicates that theres greater upside potential from a rerating for CLS than for Tritax Big Box.
Certainly, Tritax Big Box has a higher yield than CLS at 4.4% versus 3.4%, but its not as well covered. Tritax Big Boxs profit covers shareholder payouts 1.3 times, while for CLS this figure is higher at 1.9. This indicates that CLSs dividend could rise at a much faster pace than Tritax Big Boxs and alongside its non-UK exposure and lower valuation, this makes CLS the pick of the three companies.
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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. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.