Hammerson shares were trading at a discount of more than 30% this morning as the company announced that it had approached Intu, the shopping center owner, with an all-share offer.  While investors have not been enthusiastic about the UK real estate sector since the Brexit vote, the fact that Hammerson has opened its cheque book for another UK property play is considered by some analysts to be significant.

There is also the issue of ebbing consumer confidence, which The Armchair Trader believes will be a huge theme for UK stocks in 2018. Bricks and mortar retailers must also struggle which the shift to online shopping. So why buy a company that is heavily exposed to shopping centres?

Anecdotal evidence? Shopping centres are far from the deserts The Armchair Trader recalls in the early 1990s, when the UK was in the grip of a recession. Intu’s shares were trading at a massive discount of 37% and the company owns some big marquee centers like the Trafford Centre in Manchester and Metrocentre in Gateshead.

Russ Mould, Investment Director at AJ Bell, says that the Real Estate Investment Trusts (REITs) in the FTSE have not being showing any signs of Brexit-related stress. Compare their performance with the massacre of their shares in 2007/08 and they look relatively healthy. Prices are not back to where they were in 2007, but we would be worried if they were.

“The big four REITs still trade at meaty discounts to net asset value and it will be interesting to see if anyone else shares the faith shown today by Shaftesbury and Hammerson that UK property is still a good long term investment, as the lowly valuations on offer are another indication of how you can have cheap stocks and good news, just not both at the same time.”

And Shaftesbury? Hammerson’s fellow REIT in the FTSE 100 owns 14 acres of prime London property, among them the likes of Chinatown, Soho and Carnaby Street.  It is in the process of raising £265 million for two deals in Soho and which should give it financial firepower to fund further purchases. The Shaftesbury management team is seeking to raise the funds at 925p per share, which is in line with its NAV.

Will we see a rally in UK REITs? As with many UK-focused plays, a great deal revolves around the ongoing Brexit negotiations. A bad Brexit deal will crucify REITs that have too much exposure outside London and the south east of England. REITs with a big focus on London, like Shaftesbury, may continue to do better. After all, as a big Latin American investor told me last month when asked about Brexit and whether it would affect his investing habits in Europe: “London is London.”

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6th December 2017
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