REAL ESTATE - Marks & Spencer could increase its share price by almost 80p to 580p if it places its property portfolio in a REIT, investment bank Morgan Stanley says.
A research note issued by the bank’s real estate desk, anticipating the introduction of new legislation in 2007, said the retail company would be better off setting up a REIT and leasing its property back at an estimated rental yield of 5.6%.
Valuing the retailer’s property portfolio at £4bn (€5.8bn) – assuming a 6% increase in value during 2006 – the bank’s real estate desk said the move could liberate cash for payout to shareholders or reinvestment.
Morgan Stanley analyst Brooke Bone admitted the analysis had been “a theoretical exercise” but said there were several good reasons for the firm to consider a REIT. Conversion to a REIT would make the retailer’s property assets more transparent. It would also enable investors better to value the company based on its retail assets and focus managers’ attention on the core retail business.
Under the Morgan Stanley plan, shareholders would be eligible for shares in the REIT and receive dividends from its tax-free profits. REITs are not subject to corporation or capital gains tax (CGT), and tax liable on conversion would likely be significantly lower than the current CGT rate.
The downside of conversion – both for M&S and potentially for other companies if draft REITs legislation enters the statute books in 2007 in its current form – is loss of control over the property portfolio. The draft legislation caps shareholdings at 10%.
“The problem is they’ll have to sell the property,” said Bone. “Even if they structure it to incorporate different tenants’ rights, doing so will have a knock-on effect on value. It’s something they won’t take lightly.”
Morgan Stanley has not factored the REIT plan into its price target for the retailer, which said it never comments on analysts’ notes.
