Should you avoid UK property?
Since the credit crunch, the UK property market has soared. Particularly in London and the south east, it has offered relatively dependable growth that has left many investors contemplating selling shares and piling into property. However, results released today from diversified property business Countrywide (LSE: CWD) are rather disappointing. Could now be the right time to ditch UK property?
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Falling profitability
Countrywide's trading update for 2016 shows that total income rose by just £3m to £737m. However, total income for the final quarter was down year-on-year. It was just £179m versus £196m for Q4 2015. As anticipated, the underlying level of market transactions in the final quarter continued to run below 2015 levels and there's expected to be a total drop of 6% for market volumes from their levels in the previous year.
The company's London and Retail divisions were a main cause of the disappointing results. Lower volumes were somewhat offset by the strong performance from Lettings, as well as from the Financial Services and Surveying divisions. However, the overall picture seems to be downbeat and the business is focused on delivering cost reductions and increased productivity. It hopes that this move will mitigate the impact of a 2017 sales market that's expected to show a reduction on 2016 volumes.
Wide margin of safety
In 2017, Countrywide is expected to post a fall in its bottom line of 2%. While disappointing, the company's shares appear to factor in this difficult outlook. It has a price-to-earnings (P/E) ratio of just 8.6, which indicates a wide margin of safety. And with it yielding 5.7% from a dividend covered twice by profit, now could be a good time to buy it.
Similarly, commercial property specialist Land Securities(LSE: LAND) also offers upside potential. It's expected to report a rise in its bottom line of 4% this year, followed by growth of 7% in the following year. Although it has a P/E ratio of 22.2, its price-to-book (P/B) ratio of 0.7 shows that it also has a wide margin of safety. And with a yield of 3.6% covered 1.3 times by profit, now could be the right time to buy it for the long term.
Challenging outlook
Of course, wide margins of safety are required for both Countrywide and Land Securities because of the uncertainty facing the broader UK economy. Inflation is expected to increase to as much as 3% this year, which could prompt discussion of a higher interest rate. This could make the affordability of property lower due to higher borrowing costs. Similarly, confidence among businesses and individuals may fall as negotiations start between the UK and EU.
However, with high and well covered yields, plus appealing valuations, both Countrywide and Land Securities could be worth buying for the long term. Their share prices may be volatile this year, but could deliver high total returns in future years.
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Peter Stephens owns shares of Land Securities Group. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
