Buy this property fund for its secure 4.2pc yield, 6.6pc discount and reasonable fee
UK Commercial Property Reit is run by experienced managers who are steering it away from the retail sector
QUESTOR likes to recommend investment trusts that have attracted significant backing from a respected professional investor and this week’s tip certainly passes that test: a full 10pc of the UK Commercial Property Reit is owned by Investec Wealth & Investment on behalf of its clients.
Another appeal of this trust, which yields more than 4pc, is a discount of 6.6pc when the average over the past year has been only 3pc.
Investec’s Chris Hills told Questor why he was happy to hold the trust. “It is run by Standard Life, an experienced manager of property funds,” he said. “We meet them regularly and what they say is sensible. The firm’s depth of knowledge in property investing gives the managers a good grip on the portfolio. And the share price is probably
a bit cheap relative to the fundamentals of the market.” The trust, which recently acquired Reit (real estate investment trust) status and amended its name accordingly, has relatively little exposure to “pure” retail assets, which are under pressure as a result of the rise of online shopping, although it owns some retail warehousing.
In January it sold three shopping centres in Shrewsbury for a small premium to book value. “It got what would now be seen as a good price for these properties, which amounted to about 6pc of the portfolio,” Hills said.
“They were problematic assets in what could not be called a prime location.”
He said the managers were trying to shift their focus more to logistics warehousing, an area that can benefit from the rise of online shopping. “There is now more demand for storage from retailers and distribution companies, whose business model allows them to pay more in rent than previous occupants of the properties,” he added.
In all, about 21pc of the portfolio is retail warehousing, with about 12pc in other retail property such as shopping centres. A further 37pc is in “industrial” property, which includes logistics assets along with a few factories, Hills said.
Offices account for another 20pc, although there is minimal exposure to the City of London.
The remainder of the portfolio consists of “other” property such as hotels, cinemas and gyms. Hills said the dividend was secure, although “there will need to be some rental growth in the next couple of years before they can think about raising it”.
In all, 93pc of the portfolio’s assets are let and many of the tenants are blue-chip names, such as Ocado and B&Q, or public sector bodies.
The attractive yield is achieved without heavy reliance on borrowed money or “gearing”, which at about 11pc is well below the typical level of 25pc-30pc among property trusts.
The trust’s costs are also reasonable: last week it announced a more competitive fee structure of 0.6pc on gross assets up to £1.75bn and 0.475pc thereafter. The current fee is 0.65pc as well as a £100,000-a-year administration charge. Questor says: buy
Ticker: UKCM
Share price at close: 88.2p
Update: Montanaro UK Smaller Companies
This trust, tipped here in February last year, has announced a change to its dividend policy.
From October it will declare quarterly payments equal to 1pc of the trust’s net asset value at the end of the previous quarter. If the shares traded at NAV this would mean a yield of 4pc, but at the current discount of 15.1pc the yield would be about 4.7pc.
We tipped the trust at 489p. There was recently a share “split”, so each “old” share represents five shares now. Accordingly, the current price needs to be multiplied by 5 for a like-for-like comparison. The shares closed last night at 121p, so 605p is where they would be if the split had not taken place. This is a 23.7pc gain for readers who followed our tip.
We would expect the discount to narrow when the new dividend policy takes effect. Hold.
Investment trust news
John Laing Infrastructure Fund has recommended the bid recently made for the trust. If shareholders approve they will receive 142.5p per share in cash plus a dividend of up to 3.57p.
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