Shorts steer clear of Property; remain bearish on Retail

Investing in property related companies is surely the safe haven when the world is as volatile as it is right now. The twin peaks of rental income and capital growth appeal when there are question marks over pretty much every other sector from the embattled Financials to the struggling Retailers and the potential bubble in Technology. However, with retail companies key tenants of listed property firms, there could be a mismatch between how much rent they can actually pay and what their landlords need in order to grow their profits. After all, retailers dominate the list of most shorted FTSE All-Share names, as noted by the Financial Times in its property review. Aside from Great Portland Estates (LON:GPOR), investors remain unconcerned and there is low short interest in most listed property companies. That said, there is some recent increase in names like Shaftesbury (LON:SHB), British Land (LON:BLND) and Capital Shopping Centers (LON:CSCG).

Chart 1 – List of FTSE All Share companies with highest percentage stock on loan

Before we get too worked up, the recent increase in short selling in Shaftesbury, British Land and Capital Shopping Centers is off a low base, so is less significant. If we look at Westfield Group, the Australian firm behind the massive new shopping center in west London we also see low short interest. See the Bloomberg Relative Value screen below.

Chart 2: Great Portland Estates Relative Value Screen

The only commercial property firm where investors have built up a sizeable short position is Great Portland Estates. Short sellers gave up shorting this firm in Q3 last year against a rising share price. However, they have resumed the expression of a negative view, with the proportion of the company’s shares on loan more than doubling from 3% to 6.5% since December (orange line in the chart below). This has not stopped the share price rising 20% over the same period.

Great Portland Estates seems to divide opinion. Some think the combination of a strong surge in the share price, the fact that the projected spend on buildings this year will double gearing and the shares trading at around a 20% premium to NAV is reason to think the share price is too high.

Others are buoyed by the recent let of 86,535 sq ft at GBP 59.6 / sq ft and evidence that demand outstripping supply for office space in London’s West End, where the company owns most of its assets. This view translates into investor action since we see that those funds who lend their shares are pretty positive about Great Portland Estates. Such institutional owners have increased their holdings by 50% to 30% since the beginning of the year – an annual high (grey line in the chart).

Chart 3: Great Portland Estates
 

Bottom Line

Short sellers are generally absent from the commercial property sector despite a struggling retail sector.