Real-Estate Investment Trusts (REITs) can provide a valuable source of income and a useful hedge against inflation as the underlying property values rise over time, but the share prices of many of these funds have been bid up to dangerous levels.
One potential pocket of value is the new M7 Multi-Let REIT that is planning to invest in regional industrial units in the UK. It is hoping to raise up to £300 million at its forthcoming IPO and once fully invested will target an attractive dividend yield of 6.5% with quarterly payments and total shareholder returns of 10% per annum. If all goes to plan its admission to the main market of the London Stock Exchange is expected to take place on 13th November.
M7 is a specialist multi-let asset manager that was established in 2009 and runs £1.1 billion of assets in the UK and a total of €4.7 billion across Europe. Investors can take further comfort from the fact that the Board of the new REIT will be chaired by Stephen Smith, a former Chief Investment Officer of British Land.
Some of the money raised during the listing will be used to acquire two portfolios of assets that are currently being managed by M7. About 80% of the rental income from these come from regional light industrial units, with the rest being derived from office space and retail assets. The manager has also identified a pipeline of other attractive properties and will aim to invest the rest of the capital within nine months of the listing.
There are a number of other REITs that are already up and running that provide exposure to the regional industrial markets via light industrial units, warehouses or other logistics assets. These include Big Box Tritax REIT (LON:BBOX), LondonMetric (LON:LMP), SEGRO (LON:SGRO), and Hansteen (LON:HSTN). Their attractive income and growth characteristics have pushed them on to an average 7% premium to NAV and reduced their prospective yields to just over 4%.
Hawksmoor Investment Management, which runs a couple of fund-of-funds, has recently invested in another new listing in this area, the Warehouse REIT (LON:WHR). They say that it has an attractive portfolio of properties that meet the rapidly growing demand for e-commerce distribution sites and other industrial units.
The Warehouse REIT is trading close to its issue price and is targeting a 5.5% yield once fully invested. It raised £150 million at its IPO in September and has used part of the proceeds to acquire a seed portfolio for £108.85 million. The fund focuses on well located assets with plenty of opportunity to enhance value through asset management and has recently invested in four additional multi-let industrial estates for £26.25 million at a net initial yield of 7.5%.
UK REITs are exempt from UK tax on both rental income and capital gains relating to their property investment business. In order to qualify for these valuable benefits they have to meet certain requirements, one of which is that they have to distribute at least 90% of their rental income in each accounting period to their shareholders.
The M7 Multi-Let REIT and the Warehouse REIT are both available at their net asset value and provide a high yield and exposure to the growth opportunities provided by regional industrial facilities. Their performance will depend on the skills of the investment managers in choosing the right properties and the health of the local economies.