MR MONEY MAKER: Palace Capital is fit for your portfolio

MR MONEY MAKER: Commercial property covers a wide market and Palace Capital is fit for your portfolio

What’s happening?

After all the pandemic lockdowns and economic shutdowns, possibly the most surprising thing has been how resilient markets have been – at least for the moment. 

However, there were some key areas where the business fundamentals were shaken to their core, and in the case of the property market, their quite literal foundations. 

With empty buildings and companies consequently restructuring their office footprint, as well as retail moving from ‘bricks to clicks’ at the speed of your broadband (well not mine, anyway), the commercial property market has seen its greatest change in living memory. On that basis, it would be wise to perhaps wait and see how this settles down. 

Challenging times: The commercial property market has seen its greatest change in living memory

However, in any market there may be some exceptions and Palace Capital could be one. 

From a staggering share price back in the noughties of over £27, it has been at £3.70 as recently as 2017, and then fell further back to £1.73 in late June last year. 

Since then, we have seen a recovery to a respectable – but still modest – £2.64. Shareholders have benefited from a decent and consistent dividend flow and so it has been a good investment ‘compounder’. 

However, dividends should depend upon solid cash flow and property companies rely upon steady rental income in order to sustain this.

Why Does It Matter? 

What is different about this company from any other in its sector? Well, for one thing the business has consistently retained its rental income (over 80 per cent in the past quarter) when many others have struggled or lost a good proportion of theirs. 

This shows a greater understanding by management of their portfolio of customers than seen elsewhere. 

Now of course this may be just a delayed reaction before shutters come down, but rather I think reflects the quality of the management of this relatively modest property company. What I like is that it has focused on some of the less fashionable centres which are far more likely to benefit from the property restructuring as valuable London sites see prices fall and tenants twitch on rental days.

What Should I Do? 

Commercial property covers a wide market and I prefer to look at local developments and then have a better understanding of their opportunities. 

Palace Capital has a valuable flagship development in York, which seems to be successfully managed, as well as new income streams from both Halifax and Northampton. 

Any Suggestions? 

The share price is still at a reasonable value, especially in such an unfashionable sector, but the single stock risk I can appreciate will not be appealing to many. 

As an alternative, a broader commercial fund might be more appealing and thus the iShares UK Property UCITS ETF would be more suitable. 

Justin Urquhart Stewart co-founded fund manager 7IM and is chairman of investment platform Regionally. 


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