Investors Chronicle - Time to take property profits?

Investors Chronicle - Time to take property profits?

"Starting valuations, not the economic backdrop, are the key to future returns." This often-ignored stock market wisdom, the mantra of Richard Buxton, head of UK equities at Schroders, is particularly apposite in explaining the year-to-date performance of UK real-estate investment trusts or Reits.

A weighted basket of large- and mid-cap Reits would have risen by 17.4 per cent so far this year. Meanwhile, the FTSE 100 index is up only 2.9 per cent. Industry fundamentals can hardly explain this stunning outperformance. Quite the opposite. Having bounced in the second half of 2009 and 2010, commercial property values followed the economy into a double-dip last autumn. On average, they now stand 2.5 per cent below their November level, according to data provider IPD.
The Reits tend to own better than average properties, with a big bias towards economically buoyant London. Nevertheless, with the notable exceptions of the West-End specialists Derwent London, Great Portland Estates and Shaftesbury, their portfolios have still been little better than flat. British Land, probably the most resilient of the large-cap Reits, saw its portfolio rise by a meagre 0.4 per cent during the six months to 31 March. Its arch rival, Land Securities, posted a slight valuation deficit for the same period.
Yet Land Securities' shares are up 23 per cent so far this year. In the absence of much good news from the company, the most plausible explanation is simply that they were too cheap after a terrible autumn in 2011. When we reviewed the sector as part of our annual FTSE 350 report in January, the shares traded on a 27 per cent discount to the company's adjusted net asset value (NAV). We noted at the time that it did not deserve such a low rating, and since then the market appears ......