Something Even Safer than Houses?

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As the well-known saw has it - "Property goes up for ever doesn't it ?" After all, even if the buildings fall to pieces, they're not making the land they stand on any more.

And if you are looking for an investment that you can hold for ever - and not worry that even the likes of CocaCola will grow old, its product fall out of favour, or that Buffetology will lose its magic - while willing to ride any ups and downs - then property is the only one, surely ?

But which property?

The IPD commercial property index has only been going for 26 years. In that time there was the 1989-1992 recession when its 'all property' sector fell back by 15%, having risen 2.5 times in the eight years from 1981. Even at that bottom therefore, with retail price rises having averaged 8.3% pa in the period, property still ended up marginally ahead of inflation.

Since that 1992 mini-recession and up to January this year, inflation has averaged only 2.7% pa (totalling 45%). With the IPD all-property index ahead by a whopping 5.2 times over that period, no wonder the FTSE index of property shares surpassed the rest of the FTSE. That continued after 999, when the IPD index accelerated even further and the FTSE 350 real estate index doubled, while the FTSE 100 stagnated.

Now, however, the picture is very different. The FTSE real estate index is down by 25% since the January peak - the sharpest correction ever, as far as we can see - but it is STILL double its level in 1999, and still 65% ahead of inflation !

So, even in uncertain times, as an inflation beater property looks pretty good. But what next ? Unfortunately the reasons for the sharp fall this year look obvious, and look likely to continue to depress the sector for we know not how long.

That is because it was retail property that led the chase upwards since 1992 with a nearly 8-fold increase - closely followed by offices as the City expanded. Now, retail spending and, with it the rents retailers pay, will come under pressure as consumers face demands to repay their borrowings and feel less well-off as house prices (perhaps) stagnate. And as reliably as night follows day, as in every economic cycle since the war there, has been an office building boom (like an old fashioned 'pig cycle') that is storing up excess space and problems for office rents in the next few years. All this, at a time when property owners and developers will (probably) face higher borrowing costs.

All the more reason to look for a property sub-sector that (miraculously ?) might be unaffected by all this. And we think we have found one ! Assura Group has a not insignificant £550m market cap, and its shares are currently only 4% below their January peak. In June - unlike practically any other property company - they were actually 20% ahead.

The secret lies in Assura's tenants, and the security of its future demand and rents. It is one of an expanding breed of companies who have realised that the NHS's stated objective in 2001 to expand private involvement in the provision of care 'closer to the community', and to enhance the quality of the doctors surgeries and local hospitals that will provide it, gives them the opportunity to develop, own, and lease the properties that will be needed. When both main political parties have agreed that this is the way forward, who can pass up the cast-iron rents that will thereby be guaranteed by the NHS ?

Assura came to the market in 2003 when it was named the Medical Property Investment Fund, changing its name in 2006 to Assura Group to reflect an expansion into providing medical services alongside its property holdings - but it had been running for some time before that, as have the four other - much smaller - listed companies in the same business.

Amazingly, unlike practically any other listed property company, Assura's shares at 212p are currently 60% higher than their stated net asset value. Until January, many other property companies also saw (not quite as large) share price premiums to assets, as investors looked forward to continuing rises in values. But, now, many of the largest are rated at more than 25% BELOW their asset values, as investors contemplate the falls in value that look likely from now on.

So one can see why Assura is popular. It is still expanding rapidly. It has a 'pipeline' of new properties that - when they are completed within about the next two years - will nearly treble the size of its estate. And with rents for them agreed even before construction commences, the upward revaluation that (provided interest rates do not go 'through the roof, so that the general level of rental 'yields' that investors are willing to accept does not rise too high) ought to come about when they are completed and occupied could substantially add to its current 132p asset value per share.

The same considerations apply to the few other companies in the sector that are listed. But some of them are so small that, with their shares almost illiquid, their share prices are actually STILL below current or asset values expected in the near future. If they stay that way, a giant like Assura, or even the second largest in the sector - Primary Health Properties - might be tempted to bid for them.

This is not meant to be a comprehensive analysis of the others, or a recommendation to buy. But investors might be advised to keep a good eye on MedicX (MXFC), CareCapital (CARE), Primary Health Properties (PHP), and (on PLUS - but don't be put off by that) - AH Medical Properties (AHMP)

John Cornford Oct 8 2007

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