Property investment capitulation draws near

Its exciting time for investors in commercial property shares. Why? Because we are reaching the capitulation point. This is the mythical stage where investors are so sickened by their financial losses that they give up, walk away and vow never to invest in commercial property or shares again. CAPITULATION!

At that point so the theory goes the last of the force sellers exit the market and from that point on the share price and company values start to rebuild.

We are getting close to that point, but no quite yet. Confidence in bank shares is starting to stabilise, housebuilding stocks have probably hit the bottom. The next sector to stage a recouvery is likely to be commercial property shares and this is why.

1. commercial property shares have been obviously hit by a huge slump in commercial property values. However, shares have fallen faster and further than values of their underlying assets leading to massive discounts of share price to underlying asset values. Whilst this can be explained by the fact that investors are pricing in further falls, some time soon probably towards the end of the year real values will start to stabalise and these discounts will be revealed as ludicrously large
2. sentiment - the share market is all about sentiment at the moment. Fear has taken hold and many investors battered by massive and often inexplicable falls have bolted for the door. Once this sentiment changes as a result of capitulation investors will awake to the fundamentals.
3. fundamentals - share prices for commercial property stocks are pricing in an apocolyptic scenario. Things are bad and going to get worse. Fundamentally though alot of occupiers will continue to need property and accommodation. The market is full of property shares yielding over 10% and I have checked out there consolidated income statement to show that these yields are sustainable unless the property companies suddenly start having massive voids. A year ago no body would have believed that these kind of figures would have been achievable. How quickly a market changes from greed to fear!

What stocks should I be buying?

As I said landlords and investors should be looking out for tell tail signs of capitulation, but here is a property investment share to buy, more tips in subsequent posts

Mapeley

Share price £10
NAV £17.32
dividend £1.27

Mapeley is a classic case of the City not understanding a company. Mapeley is a hybrid which has confused the City. It is partly property investment company but mainly an outsourcing company deriving much of its income from managing other companies property requirements. The result is that it generates much greater levels of income than traditional property investment companies.

In its unaudited quarterly results for the three months ended 31 March 2008 it announced that it owns and manages a commercial property portfolio of over £2.0 billion covering some 2.4 million square metres throughout the UK.

Highlights

• FFO* the key measure of operating performance up 226% to £45.0 million,
equating to 153 pence per share** (31 March 2007: £13.8 million, equating
to 47 pence per share)
• Excluding the effect of above average asset management receipts in the
quarter, FFO remains stable at 48 pence per share (31 March 2007: 47 pence
per share)
• EBITDA*** increased by 8.9% to £35.6 million (31 March 2007: £32.7
million)
• Revenue down 4.3% to £99.6 million (31 March 2007: £104.1 million)
• Loss before tax of £27.4 million (31 March 2007: profit before tax of
£11.4 million) due to non-cash revaluation losses in the quarter of £39.2
million in line with market trends
• Total asset value of £2,253.9 million (31 December 2007: £2,317.6
million)
• NAV per share decreased to £17.32 per share (31 December 2007: £18.62)
• Dividends to be paid at the half year and full year rather than
quarterly
• Over 90% of our income is derived from government and investment grade corporates, with low vacancy rates and a 10 year average lease length across the
portfolio.

The current price is at a discount to asset value of 43%. However as Citi property analyst Harry Stokes observes Mapeley should not be valued as an investment company

"We use enterprise value/EBITDA because we consider property outsourcing an earning play, not a property play" he said.

This all means that you have a company with a cast iron and rising income stream, most of its properties are let to government or the Santander Bank (formerly Abbey). The company is paying a whopping and rising dividend and trading at a discount to underlying asset values into the bargain.