Property on the Stock Market

Property Investment on the Stock Market

'Property' has long been a subject of endless fascination and heated debate. But until recently, property investment was beyond the means of most ordinary people and only really of interest to the professional investor. It was the advent of ‘buy-to-let’ in the mid-nineties that revolutionised our attitudes toward property investment.

The Council of Mortgage Lenders reports that gross buy-to-let mortgage advances increased by over 500% between the years 2000 and 2005:

The very concept of buying property as an investment has become so engrained in our collective conscience that it is now regularly viewed as an alternative to rival the traditional pension. And having embraced residential property as an investment, it has only been a short step for many private investors to branch into overseas property ('fly-to-let'), commercial property and even full scale property development.

Property Investment on the London Stock Exchange

However, not everyone has the time or resources to invest directly into the property market. And even those with the resources might wish to spread their capital across a more diversified portfolio.

Investing in property through the stock market gives a number of advantages over doing so directly. Whilst property can take months to buy or sell, property shares can usually be traded instantaneously. And whilst a direct investment requires a major capital outlay with heavy transaction fees, buying into property through the stock market can be done at any level, with no minimum capital and with comparatively small transaction costs.

Investing in property through the stock market means buying shares in companies working within the property industry. And there are many different types of business involved. For the sake of this article, we are going to focus on the Industry Classification Benchmark (ICB) sub-sectors ‘Home Construction’, ‘Real Estate Holdings & Development’ and ‘Real Estate investment Trusts’.

·          Home Construction - residential homes, including mobile and prefabricated homes

·          Real Estate Holdings & Development - companies that invest in real estate through development, management or ownership, including property agencies

·          Real Estate investment Trusts - investment trusts or corporations (REITs) and listed property trusts (LPTs)

Current Market Factors

Every industry sector has its own unique set of risks and factors that affect the performance of the individual shares. Property in itself is a relatively stable investment, but these factors will influence demand and affect the underlying price:

·          Interest rates. One of the most important factors to consider when deciding upon whether to invest in the housing market is the bank interest rate. A low rate improves mortgage affordability, increases buyer confidence and strengthens the private sector housing market. And vice versa. The Bank of England has kept interest rates on hold at 4.5% this month - for the 11th consecutive month.

·          State of the Economy. Cyclical vs defensive stocks: Defensive stocks are generally considered to be more resilient to downturns in the economy, whilst 'cyclicals' will flourish in the good times and suffer when the economy dips. Property is considered to be 'cyclical' - the residential housing market will suffer from lack of confidence in a recession whilst commercial rents will also suffer if consumer spending dips.

·          New legislation. There are currently several new pieces of legislation coming into effect - and the industry is undecided upon the likely outcome.

·          HIPs, or Home Information Packs, come into effect in June 2007. This is a new requirement for the seller of a property to provide all potential buyers with information on the property title, standard enquiries, and an energy performance certificate. This is likely to cost the seller around £1,000 and detractors suggest it may slow the housing market.

·          Housing Act 2004. This new piece of legislation is yet to be fully implemented, but in essence requires landlords renting out Houses in Multiple Occupancy (HMOs) to be licensed by the local authorities. The exact definition of what constitutes an HMO seems to vary from one council to the next, but this legislation is certain to affect the buy-to-let market.

·          Targets for 'Brownfield Development' and 'Affordable Housing'. There have been a number of government initiatives aimed at encouraging the redevelopment of the inner-cities and providing more social & affordable housing for 'key workers'. For example, the Starter Home Initiative (SHI) aims to help 10,000 key workers into home ownership in areas of expensive housing, where key workers are leaving existing jobs, or not taking up new vacancies.

Something for Everyone!

Property companies vary in size from the massive to the microscopic. The FTSE 100 contains giants such as Hammerson, Liberty Intl, British Land and Land Securities, which focus on commercial property and shopping centres. The FTSE mid-cap sector contains most of the well-known UK house builders, whilst the small-cap and AIM indices contain companies specialising in almost every aspect of the property industry.

There are currently 105 property companies listed on the London stock market - 35 are listed within the FTSE 350, 28 sit within the SmallCap or Fledglings indices and the balance fall within AIM.

The Property Top 10

The two largest companies in the property sector stand head and shoulders above the rest. Land Securities and British Land are both involved in the ownership, management and development of commercial property.

Land Securities was established in 1944, when founder and chairman Harold Samuel (who coined the phrase "Location, Location, Location") bought a small investment trust, which at the time owned three houses in Kensington together with some government stock. The company now control a £13 billion investment portfolio, which includes one million sq. m. of office and retail floor space in London, 30 shopping centres, 30 retail warehouse parks and 10 supermarket properties across the UK.

Land Securities' share price has risen 7.9% in the first 6 months of 2006, on the back of strong quarterly results - with Q1 operating profits up 24% from the previous year to £2.4 billion (news release 27/04/06).