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Six small cap property companies

Smaller property concerns offer higher risks and rewards

Important: This is not a recommendation for you personally to buy or sell any small cap property companies. I’m just a private investor, storing and sharing notes for wider interest. Read my disclaimer.

We’ve seen how most of the UK’s big commercial property companies are trading at discounts. If you believe the pessimism about Europe and the global economy is overdone, then some offer good yields as well as seemingly undervalued assets for you to snap up.

There is also a plethora of small cap property companies and developers in the FTSE All-Share – although fewer than before the 2008/9 downturn, which inflicted several fatalities in the sector.

In many cases the surviving small cap property companies appear to be even more attractively valued than their larger brethren. But with the greater potential of small caps comes more risk, too.

Of the various elements I suggested you dig into when we looked at the large REITs, I’d say you should pay extra attention to management, insider ownership, and any funding commitments or requirements.

For example many private investors follow London developer Quintain Estates, which has residential sites in Greenwich and Wembley, and other assets and operations besides. On a net assets basis, it seems hugely undervalued. It has also attracted the interest of the well-regarded active investor Laxey Partners, which is now the major shareholder.

However I’ve not been able to reconcile myself to the seemingly large amount of money Quintain will need to complete work at its sites (at least when I last looked at them a year or so ago). I did hold the shares briefly, but I sold them for a small loss as I decided I wasn’t very comfortable.

Similarly, while I’ve owned shares in the first three of the following six firms at some point or another, I don’t currently hold any of them, as I’ve reshuffled the active portion of my portfolio to try to take advantage of the ongoing volatility (remember: don’t do this at home!)

Small cap property companies I like

I think all these companies have some attractive qualities and good potential, but obviously also risks. Please remember to do a lot more research before even considering investing – these are just jumping off points for further research.

Mountview Estates: This interesting company buys residential property that is blighted by legacy rent controls. (Blighted from our perspective, not the tenants’!) These rights eventually lapse with the death of tenants, and the property can be refurbished and/or resold. Mountview is potentially a very undervalued play on residential property paying a reasonable 4% yield, but you’ll have to think long-term.

Daejan: A family dominated FTSE 250 firm with residential and commercial property interests in UK and the US, especially London. Very steep discount to NAV (it’s priced at 0.5x book value) but the dominant family aspect and the more second tier assets it holds (in my personal opinion) means it very rarely trades at a premium. Perhaps also worth considering for the great long-term dividend record, though the starting yield is only 2.8%. Suffered recently in the fall out from the collapse from Southern Cross care homes.

Mucklow: Sort of a mini-Segro at £180 million but mainly focused in the Midlands region, Mucklow is another conservatively run family affair with a superb dividend record. The yield is currently 6.2%. I held until a few months ago, when I swapped it for something more volatile that has since fallen. The sort of company I should try to tuck away for the long term.

Panther Securities: A £52 million small cap run by wily veteran Andrew Perloff, who is noted for his hilarious and strident annual reports as much as his good long-term results. Almost like investing in a private company run by your clever uncle. Horrible spread, so try a limit order or a ‘real’ broker.

McKay Securities: Another £52 million outfit, this time focused on commercial property in the south east and around London. It’s priced at 0.6x book value but there’s around £120 million of debt, secured against just under £220 million of assets. That looks a bit precarious, but the managers do inspire some confidence. They didn’t raise cash in the downturn, and they recently spent £2.7 million on a new modern office in Bracknell that is being let for a yield of over 12%, even though it’s not yet fully occupied. Risky but could be very rewarding.

J Smart: An even smaller cap property developer with plain speaking management. It recently issued a mild profit warning as occupancy levels fell and construction remains subdued. Looks cheap, but under the cosh and will need a turnaround in UK PLC to get going.

Finally, a reader asked about commercial property investment trusts. The only big one I’ve ever invested in is £700 million F&C Commercial Property. It’s on a small 6% discount and pays a 5.8% yield. I suspect it’s becoming popular with income seekers at present, though that’s just a hunch. About four-fifths of the portfolio is in London, with the rest spread about the UK. As with nearly all property companies there’s a fair bit of debt, with gearing near 30%.

Of course, mainstream investment trusts might also invest in commercial property. The currently much-hated Caledonia trust has money in London & Stamford and the aforementioned Quintain, for example. Beware, Caledonia’s shares languish on a 25% discount, so while I continue to hold myself, the market clearly doesn’t think much of its manager’s judgement!

Final warning: All small cap property firms are likely to suffer badly if there’s a renewed and prolonged UK recession. I still don’t expect that myself, but the odds have undoubtedly risen sharply in the past six months.

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{ 6 comments… add one }
  • 1 mark senior December 16, 2011, 1:32 pm

    @ Investor

    Terrific series of articles. Well written, good detail… very relevant.

    Any chance of finishing series with an appraisal of property company investment trusts. ?

    Thank you

    regards

    Mark

  • 2 mark senior December 16, 2011, 1:34 pm

    Does anyone know of a collective investment that deals in these smaller property companies?

  • 3 The Investor December 16, 2011, 2:39 pm

    @Mark — As I mention at the end of this piece, the only property IT I’m really familiar with is the F&C trust. There were a few special situations type micro-trusts around, usually investing overseas, but at least a few blew up in the downturn.

    There may be some though — but I’m not familiar with them.

  • 4 Paul R December 16, 2011, 6:12 pm

    Inv Trustss -have a look at IGRE.L – used to be ING REIT, now managed by CBRE. This is mostly overseas though, mix of listed and ulinsted invesmtents.

  • 5 Salis Grano December 16, 2011, 7:03 pm

    Thanks, as ever, for these good articles. As a result, my thoughts are turning towards property once more and I expect to make one or two purchases in the next few weeks.

  • 6 The Investor December 16, 2011, 10:14 pm

    @Salis — Good luck if you do dive in. I’ve plumped for London & Stamford so far. I liked the management, the spare firepower, and the fact that 10% or so seems to have been knocked off the price by the major shareholder dumping the stock out of the blue. Hopefully an irrational bit of pricing there.

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