Mary McDougall, Investors’ Chronicle, 21 April 2022:
The past five years or so have been decidedly mixed for commercial property investors. On the one hand, Brexit, the pandemic and the rise in flexible working have upset demand patterns for office space and high-street shops. On the other, investors focused on industrial, logistics and warehouse assets – which facilitate online deliveries – have seen handsome returns.
This has resulted in a “two-tier market” for real estate investment trusts (Reits), according to AJ Bell’s head of investment analysis, Laith Khalaf. While logistics Reits trade at lofty premiums to their net asset values, retail and office landlords now sit at wide discounts. However, for a certain category of fund – owners of unloved real estate pivoting towards more so-called ‘new economy’ assets – there are much less demanding valuations to be found. As well as offering a decent prospect of income and asset growth, these funds also offer some inflation protection along the way.
UK Commercial Property Reit (UKCM), one of the largest and oldest funds of its kind with assets of £1.57bn, looks like an attractive and conservatively managed option. Set up in 2006, it is managed by abrdn’s (ABDN) Will Fulton, who recently returned to the helm following a brief spell on medical leave. For the past few years, he has been refocusing the portfolio on sectors “supported by the long-term structural drivers of the modern economy, including the continued rise of e-commerce and urbanisation”…
Asset quality
The quality of assets and tenants is crucial for the reliability of income for Reits. While UKCM’s yield is low compared with rivals at 2.8 per cent, its tenant void rate of just 2.1 per cent at the end of December suggests the trust has little difficulty in finding and retaining tenants. Rent collections proved pretty robust over the pandemic, dipping to 83 per cent in 2020 but jumping back to 97 per cent last year, in line with 2019.
While the trust is large, it only has around 40 properties, meaning the average lot size is just under £40mn. “These are typically very large and good quality assets reflected in the low net initial yield of the portfolio,” says Dan Cartridge, assistant fund manager at Hawksmoor Investment Management.
The trust also has a diversified tenant mix of around 200. The largest individual occupier is Ocado (OCDO), which makes up 5.1 per cent of its rent, followed by Warner Bros (US:WBD) at 4.6 per cent and Amazon (US:AMZN) at 4.4 per cent…
As well as downside protection, UKCM has thought about expansion, too. The trust has bought a handful of assets in the past six months that have “substantial growth potential”, according to QuotedData property analyst Richard Williams…
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