- Property trusts look cheap enough but the sector still faces its share of drawbacks
- Some of the sub-sectors that struggled in the growth sell-off of 2022 have reasserted their presence
Investment trusts are having another fallow year, with discounts remaining wide and the market not yet interested in backing new raises. The effects of that can be seen across the sector, from real estate investment trusts (Reits) increasingly buying back their own shares to very few vehicles issuing equity.
An extreme sign of this dynamic emerged earlier this month when the Special Opportunities Reit, which was due to invest in UK real estate, fell short of a £250mn minimum fundraise as parts of its flotation efforts and dropped its IPO plans. The investment team will now acquire some of its targeted assets using private capital instead.
New issues face plenty of competition at a time when discounts are so wide on existing vehicles, therefore giving retail investors direct access to cheap assets without needing to back a new trust. The average discount to net asset value (NAV) in the Association of Investment Companies’ (AIC) UK Commercial Property sector comes to a whopping 27.4 per cent, with individual discounts ranging from 66 per cent for Regional Reit (RGL) to nearly 14 per cent on the AEW UK Reit (AEWU). Dividend yields also look alluring, with an average of 8.5 per cent in the same sector. But plenty of disruption is afoot, making life more complicated for bargain hunters.
Good news, bad news
Nonetheless, specialists canvassed by the AIC recently made the case that the worst may at least be over. Andrew Rees, investment trust research associate at Deutsche Numis, said that the industrials and logistics sub-sectors were still performing well thanks to strong demand for last-mile logistics facilities, meaning that funds operating in these areas are capturing healthy rental uplifts. These funds are not out of potential ‘bargain’ territory just yet, with logistics specialist Tritax Big Box Reit (BBOX) on a discount of nearly 15 per cent and Urban Logistics Reit (SHED) looking even more unloved.
But other sub-sectors do show signs of struggle. Looking at nine trusts that published first-quarter (Q1) NAV updates in May, Winterflood found exposure to offices continued to harm returns. Offices saw capital value declines of 1.7 per cent, while areas such as retail and industrial made modest gains.
Balanced Commercial Property (BCPT) saw its NAV fall by 2.3 per cent in Q1, compared with a 2.2 per cent decline for Abrdn Property Income (API), a 1.2 per cent drop for the Alternative Income Reit (AIRE) and a 0.8 per cent fall for the AEW UK Reit (AEWU). Custodian Property Income (CREI) enjoyed a modest 0.1 per cent increase.
The diversified commercial property trusts have tilted towards more popular sub-sectors such as industrial warehouses and logistics in recent years, although the mix can vary notably. Abrdn Property Income still has a weighting of around 15 per cent to offices, while Balanced Commercial Property has 21.6 per cent exposure. Around half of the API portfolio is in industrial assets, compared with 34.7 per cent for Balanced Commercial Property.
Some specialist sub-sectors have had a better time of it, by contrast. Turning to the care home funds, Impact Healthcare Reit (IHR) saw a 1.7 per cent NAV gain in the first quarter, with its rival Target Healthcare Reit (THRL) managing 2.2 per cent. Triple Point Social Housing (SOHO) also made gains, with Winterflood attributing the good fortunes of all three to inflation-linked rental uplifts kicking in. Abrdn European Logistics Income (ASLI), meanwhile, saw a 2.1 per cent increase over the period.
Disruption ahead
Whether it’s trusts operating in fashionable niches or more diversified offerings, the persistence of wide discounts has put something of a brake on growth, with Winterflood noting that as of the end of May the sector had raised no funds for 22 consecutive months.
What’s more, consolidation is still rife: Brookfield Asset Management recently announced it was in the early stages of making an offer for Tritax EuroBox (BOXE), Balanced Commercial Property is assessing its future options including possible bids, and Abrdn European Logistics Income has put forward proposals for a managed wind-down. As such, investors can encounter serious upheaval, even if this means ultimately making a gain by exiting via a merger or a wind-down.
Other issues present challenges, with Mick Gilligan, head of managed portfolio services for Killik & Co, saying: “Fee structures tend to penalise the shareholder during downturns as they continue to pay fees on a NAV that is stale, usually outdated and higher than the share price – while the share price tends to look forward and discount market conditions.” As such he doesn’t see a “particularly bright future” for the sector.
“I think we will continue to see consolidation and maybe there will be a few larger vehicles left standing but I think the days are numbered for small sub-scale trusts with high fee burdens,” he said.