The prospect of a hard Brexit on 31 October has created pockets of value amongst the domestically-oriented parts of the UK market.
A prime example are the Real-Estate Investment Trusts (REITs), especially those that are heavily exposed to the retail sector, which has seen a large number of Company Voluntary Arrangements (CVAs) in recent months.
With an increasing likelihood of a ‘no deal’ exit, there is a good chance that there will be further share price weakness in the weeks ahead. If this is the case then the volatility could create some fantastic buying opportunities for those brave enough to withstand the short-term noise.
The shares quickly recovered
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One REIT that is already trading on a wide 18% discount is the £1.4bn BMO Commercial Property Trust (LON:BCPT). The last time the discount spiked up to this level was in the immediate aftermath of the EU referendum and on that occasion the shares quickly recovered.
BMO, which was previously called the F&C Commercial Property Trust, has a well‐regarded and experienced management team that is led by Richard Kirby. Since it was established in 2005 he has delivered a creditable annualised NAV total return of 8.1% per annum.
Income investors will love the fact that the fund pays monthly dividends of 0.5p per share with the annual dividend having been maintained at this level since it floated 13 years ago. At the current share price this translates into an attractive yield of 5.4%.
The fund holds a diversified portfolio of freehold and long leasehold UK commercial properties that are intended to generate long-term growth in capital and income for shareholders. At the end of March the largest weighting was the 39% exposure to offices, followed by the 23% allocation to retail, 18% to industrial and 11% to retail warehouses, with the other 9% in alternatives.
No exposure to shopping centres and limited exposure to the High Street
Most of the retail investment is in the West End, with the fund having no exposure to shopping centres and limited exposure to the High Street. The main problem has been the retail parks, which are classified as retail warehouses, as these have been affected by the weakness in the sector.
Tenants such as New Look, Mothercare and Homebase have all entered into CVAs, while Poundworld has gone into administration. The management team has identified ways to attract new retailers to the properties, but these require planning permission and advanced negotiations with potential occupiers are still taking place.
As a result of these difficulties the void rate increased to 8.5% in 2018, although this has since fallen to 4.9% at the end of March. Dividend cover last year was down to 80%, but should recover following the reduction in the void rate in the first quarter of this year.
The problems in the retail sector and the risk of further difficulties have seen the fund significantly de-rated, with the current discount of 18% much wider than in the past, with it often having traded at a premium. It is also worth noting that the low loan‐to‐value ratio of 20% means that it is quite defensively positioned.
It is clear that the weakness in the retail sector and Brexit-related uncertainty have weighed heavily on the shares in the last few months. The latter now looks likely to come to some sort of resolution by the end of October, in which case the volatility in the next few weeks could provide a fantastic buying opportunity. It is well worth keeping a close eye on.