Specialist property funds that provide inflation-linked income

2 mins. to read
Specialist property funds that provide inflation-linked income

A couple of weeks ago I wrote about the new Supermarket Income REIT (LON:SUPR), which is in the process of buying a portfolio of supermarket freeholds. These sites that are already up and running will then be leased back in order to generate a high and inflation-linked yield for investors.

SUPR is one of a growing number of specialist Real-Estate Investment Trusts (REITs) that provide exposure to alternative areas of the property market. It is a diverse sector that is mainly aimed at income investors and offers a high and uncorrelated source of yield with an element of inflation protection.

One of the most recent additions is the Residential Secure Income REIT (RESI), which has just raised £180m at its IPO, although this was less than the £300m that they had been hoping for. The fund will target the social housing sector by providing finance to housing associations and is aiming to generate a 5% inflation-linked yield.

RESI joins its more established counterpart Civitas Social Housing (LON:CSH), which launched in November 2016. This offers a similar exposure and has built-up a £368m portfolio that is yielding 4.55%. The shares are currently trading on a 4.5% premium to NAV.

The sector also includes two funds that concentrate on the student accommodation market. GCP Student Living, which operates under the wonderfully appropriate ticker DIGS, and Empiric Student Property (LON:ESP) both invest in purpose-built, high-end student property. Their portfolios typically consist of good quality premises near popular universities with top end amenities that command high rents.

Their portfolios typically consist of good quality premises near popular universities with top end amenities that command high rents.

Student accommodation has been a massive growth area, especially in places like London that appeal to young people coming to this country to complete their education. It remains to be seen what impact Brexit will have, although overseas students are an important source of foreign revenue for the country.

ESP has a market value of £668m and is yielding 5.5% with the shares on a 5.5% premium to NAV. DIGS is slightly smaller at £549m and is yielding 4% and trading on a 3.5% premium. Over the last three years the shares are up 27% and 53% respectively.

Another option would be the healthcare related funds. These include: MedicX (LON:MXF), which owns a portfolio of primary healthcare properties; as well as the Target Healthcare REIT (LON:THRL) and Impact Healthcare REIT (LON:IHR), both of which rent out residential care homes.

IHR raised £160m at its IPO in March and has invested the proceeds in 57 residential care homes with 20-year leases that are subject to upward-only, RPI-linked rent reviews. The plan is to enhance these properties by adding new bedrooms using debt finance. The fund is targeting an initial yield of 6% and has just announced its first quarterly dividend.

These are all interesting areas with high potential yields, but although they are relatively uncorrelated from the more mainstream asset classes they are not without risk. This was perhaps best illustrated by the recent heavy fall in the share price of Ground Rents Income (GRIO) following the announcement of a government consultation on proposals to amend leasehold legislation.

Comments (0)

Leave a Reply

Your email address will not be published. Required fields are marked *