By Joan Muller

Senior writer

DESPITE a softer consumer market in Britain, analysts agree that Liberty International, one of Britain’s largest owners of shopping centres, remains a safe bet for South African investors who want to diversify their offshore exposure to property.

An investment in Liberty International has become particularly relevant now that a weaker rand has brought currency hedge stocks back into play. The group’s share price (in SA rand) has already rallied 10% since the beginning of May on the back of a weaker currency.

The question is whether the share is not too expensive as it trades at a price:earnings ratio of more than 30. First South Securities property analyst Leon Allison says that while Liberty is by no means cheap, its price offers fair value at its current level of around R120/share. Says Allison: “Investors must keep in mind that they’re buying quality assets.”

Allison argues that though there’s limited upside left in Liberty’s price (unless there’s further weakness in the rand/British pound exchange rate) it offers SA investors good geographic and asset class diversification and remains a low-risk play on a weaker rand. Investors are also getting an after-tax dividend yield of around 3% without having to use their SA offshore allowances.

Liberty International recently entered into a joint venture with Prudential, another major British shopping mall owner and manager. Together they own or part-own 12 of Britain’s top 24 regional malls. That brings the value of Liberty International’s property assets to £5,3bn (R65bn). Its market cap on the JSE Securities Exchange exceeds R38bn, placing it among the JSE’s top 20 listings.

Andisa Securities property analyst Len van Niekerk says that Liberty International offers value relative to SA property stocks. He says Liberty is still trading at a slight discount to Net Asset Value in the UK and there could be further upside in the share price on the London Stock Exchange. Rand weakness will provide a further kicker. Van Niekerk adds that SA stocks don’t yet offer the same quality in terms of their underlying assets.

Allison agrees. He says that retail fund Hyprop is probably the closest version in SA to Liberty. However, Hyprop’s units are relatively illiquid, and 40% of the fund’s portfolio is exposed to one property – Cape Town’s mega mall Canal Walk. Liberty International has an excellent portfolio in a more stable sociopolitical environment where stricter planning constraints make it more difficult for competing shopping centres to be built.

The group also has a solid track record of real earnings growth and a reliable income stream. Allison forecasts average earnings growth of close to 10%/year in sterling for the next three years – double the average 5%/year growth achieved over the past five years.

Higher earnings growth will be driven by major rental reviews over the next three years at new centres Braehead (Glasgow) and The Chimes (Uxbridge), plus recently refurbished centres at Lakeside (at Thurrock, on London’s outskirts) and the MetroCentre (at Gateshead). Unlike the SA scenario, rental escalation clauses are not built into leases in Britain; however, rental reviews take place usually every five years.

Both Allison and Van Niekerk concede that the key risk facing the Liberty group is the slowdown and even potential collapse of Britain’s house market, which could negatively affect consumer confidence and spending. However, its extensive redevelopment programme should partly counter any negative effects of slower consumer spending. Liberty International has committed more than £1bn to upgrade and expand many of its existing properties over the next four years.

Allison says that upgrading existing centres generally results in tenants upgrading their shops, leading to an overall improvement in the shopping experience and therefore attracting more shoppers.

Van Niekerk says that even if disposable income does come under pressure, consumers will probably favour large, regional centres (such as those in the Liberty stable), where they can conduct comparative shopping. So Liberty International, with its exposure to prime retail centres in Britain, would be in a more favourable position than its competitors to protect it from tougher retail conditions.