UK Edition
Questor: we may have to wait years for returns, so it is time to sell Capital & Counties
Questor share tip: value investors suspect the share price has hit bottom but recovery may take too long
Earl's Court in west London has been putting on a show since the Chocolate & Confectionery Exhibition opened to sweet-toothed visitors in 1937. After decades of hosting the Ideal Home Show, Brit Awards, Crufts and the Olympics, the famous conference and concert space closed in 2014, only for a different kind of performance to rumble on after demolition.
Some investors might call it a horror show. Multibillion-pound plans to build 6,500 homes on the site have been dogged by political rows and a slowdown in London’s housing market. No wonder that the company behind the project, Capital & Counties Properties (Capco), unveiled plans to spin off Earl’s Court in May.
The move immediately looked like a high-risk strategy to flush out a buyer. Four months on, the clock is ticking. Capco, whose other asset across town is the tourist hub of Covent Garden, has said that if it does pursue a demerger it will be formalised by the end of the year.
Frazzled executives could be forgiven for hoping they can do a Whitbread. After announcing a demerger of coffee chain Costa from its Premier Inns division, the leisure group won City plaudits when it sold the business to Coca-Cola for a thumping £3.9bn instead.
“Placemaking” schemes such as Earl’s Court always seem to get there in the end, or else the area around Battersea Power Station would still be a riverside white elephant. The question is one of price – and timing. Capco has cut the value of the Earl’s Court venture by a cumulative 40pc since 2015, including by another 7pc to £707m alongside half-year results in July.
The asset is in two pieces. Nearby Lillie Square is held in partnership with Hong Kong’s billionaire Kwok family. What was previously a car park is being turned into 800 homes around a garden feature. Most of the flats have been pre-sold.
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Then there is Earls Court Partnership, Transport for London’s investment vehicle with 999-year leases over the former exhibition centre and adjacent properties. It has detailed planning consent and is ready to develop. Capco owns 63pc.
Any buyer would need reassurance over what they were buying. There is mounting expectation that two housing estates earmarked for demolition as part of the development will be returned by Capco to Hammersmith & Fulham council, where Labour took control in 2014. In exchange, the company may be allowed to introduce greater property densification on the remaining site but the land value could still be affected.
Over at Covent Garden, valued by Capco at almost four times as much as Earl’s Court, the story is much clearer. The district has been prettified and taken upmarket, with the arrival of retailers including Apple, Petersham Nurseries and Tiffany. Estimated rental value is still on the rise – by 1.9pc in the last period – but not surprisingly at a slower rate than a few years ago.
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These trophy districts have enduring appeal, particularly to foreign buyers that have not been deterred from investing in London since the Brexit vote. Of course, the sharply weakened pound has helped. But there has definitely been a pause in property stocks this year.
Shares in Shaftesbury, the owner of Carnaby Street and the surrounding district, have eased by 6pc since they were tipped here in March. The spectre of a no-deal Brexit does not help. In addition, the opening next month of Coal Drops Yard behind King’s Cross is a reminder that Covent Garden is not short of rival shopping destinations.
Questor tipped Capco in early May but the shares now stand 9pc lower. They are 12.3pc below where we said “hold” later that month after the demerger plans were announced.
- Questor archive: telegraph.co.uk/questor
Value hunters have piled in, hoping this is the bottom. Notably, Credit Suisse has turned positive on the stock, setting out the case that Earl’s Court is effectively in the Capco share price free at these levels. However, the risks are high. Robert Duncan, at Numis Securities, said the split made strategic sense but neither Earl’s Court nor Covent Garden would deliver meaningful income or capital returns on a two to three-year view.
Questor now feels bearish too, even though the shares are changing hands at a 20pc discount to net asset value of 334p.
Questor says: sell
Ticker: CAPC
Share price at close: 266.3p