MIDAS UPDATE: Shares at property group Real Estate Investors soar as Birmingham attracts large companies
Upbeat: Paul Bassi is expected to see £5.8million profits in 2016
In volatile times such as these, it is unusual to find a chief executive as upbeat as Paul Bassi from Midlands-based property group Real Estate Investors. Unusual and refreshing because his confidence is based on a strong set of half-year figures, reported last week, and even better prospects for the next six months and beyond.
Midas recommended REI in July 2014, when the shares were 52p. Since then, they have risen 29 per cent to 67¼p, but they should continue to gain ground as Bassi’s growth plans come to fruition.
A 30-year veteran of the Midlands property market, Bassi claims he has never experienced more vibrant conditions in and around Birmingham, where the company operates.
The fastest-growing city outside London, Birmingham is attracting increasing numbers of large companies, both British and foreign. Retail and restaurant chains are moving to the city and it was ranked this year as having the best quality of life in the UK outside the capital.
For REI, this is beneficial on several levels. The company specialises in buying neglected properties, sprucing them up and renting them out as shops or offices. This often involves changing their use and a number of the company’s sites were former banking halls, now transformed into bars and restaurants.
In each case, once the buildings are refurbished, more businesses want to move into them and they are prepared to pay higher rents.
Improvements are seen even when conditions are mediocre. Now, with Birmingham firing on all cylinders, demand for property is particularly strong. Not only does this help REI to attract tenants and extract rental income, it also means the company can sell some of its properties at a significant profit.
Only this year, for example, the group sold a property for £8 million that it had bought for about £4 million in 2012. It also bought a property in April for £1.85 million and sold it for £2.5 million just three months later.
Soaring valuations can make it harder to find reasonably priced sites, but most purchasers are looking for commercial properties that have already been refurbished and let so they can just buy them and receive the rental income.
Bassi concentrates on seeking out unloved assets that need a bit of work to achieve their potential. And prices are still keen in this part of the market.
Half-year results to June 30 saw a 296 per cent rise in underlying pre-tax profits to £1.5 million, while the interim dividend rose 33 per cent to 1p.
Analysts expect full-year profits of £2 million, rising to £5.8 million in 2016, while the annual dividend is expected to go up from 2p for 2015 to 2.5p the following year.
The group raised £45 million in April and Bassi intends to invest this in new properties, hoping to take the value of REI’s portfolio from £130 million in June to £200 million by the end of the year.
The company also converted into a real estate investment trust this year, which means it pays less tax but has to distribute 90 per cent of its taxable income as dividends.
Midas verdict: Real Estate Investors has done well over the past 15 months, but there is still plenty of potential in the stock. Investors may wish to sell some shares to bank a bit of profit, but they should hold on to most of their stock. Long-term investors may also find value in this business.
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