The best property investment trusts

REITs offer the prospect of capital growth and a secure and rising income. Nick Sudbury looks at some of the best ways to gain exposure to these trusts. 

Real estate investment trusts (REITs) offer the prospect of capital growth, and a secure and rising income. Many of these funds have delivered strong returns in the last few years, but have weakened in the run up to Brexit, and offer some attractive buying opportunities for those willing to accept the short-term volatility.

It is likely that investor sentiment will be further tested ahead of the 31 October Brexit deadline. With an increasing chance of a ‘no deal’ exit, there is a real possibility that discounts across the sector will widen, as was the case after the EU referendum. If the pessimism is overdone, this could generate the chance to pickup these vehicles at knock-down prices.

The most commonly used benchmark in this area is the MSCI Property Monthly Index, which shows that UK commercial property returned 1.14% in the first six months of the year. This represents a considerable slowdown from the 7.5% achieved in 2018, with capital values now having fallen for eight consecutive months, mainly due to the weakness in the retail sector.

Interestingly, it is the income that has been the key driver, accounting for around 60% of the total returns from property over the last decade. In the first six months of 2019, it contributed a further 2.6%, more than offsetting the fall in capital values.

Most of the underlying subsectors have moved into negative capital growth, with the exception of the industrial sector, although there are still plenty of assets in each area that will increase in value.

The investment-company analysts at Investec Securities are cautious on the retail-property sector given the headwinds it is facing, as illustrated by the large number of company voluntary arrangements in recent months. They believe that funds with a higher exposure to the industrial and office sectors should fare better in the current environment.

Valuation is, of course, key, and the £1.4bn BMO Commercial Property Trust (LON:BCPT) is a good example. It is heavily invested in the retail sector with a portfolio weighting of 34%, but this is already reflected in the wider-than-normal discount of 18%, which offers considerable value. The shares are yielding an attractive 5.4%, with equal monthly distributions.

REITS

There is a wide range of choice if you want to invest in this area. The analysts at Winterflood split the sector into two main subsets: investment trusts providing a broad exposure to UK commercial-property assets and those that concentrate on more specialist parts of the market.

The former consists of 14 funds that are trading on a wider-than-normal average discount to net asset value (NAV) of 7.6%, and yielding an average of 5.7%. Of these the largest is the UK Commercial Property REIT (LON:UKCM), with total assets of £1.4bn.

There are a further 13 investment trusts in the specialist subsector that cover everything from student property, to healthcare, social housing and logistics. The largest is Tritax Big Box (LON:BBOX), with total assets of £2.7bn.


Investment trusts are the ideal vehicle for investing in ‘bricks and mortar’, because the fund managers will never be forced into selling these illiquid assets to finance client redemptions. Many of the open-ended funds operating in this area ran into severe difficulties in the wake of the EU referendum as sentiment deteriorated, and we have seen recently how much of a problem liquidity can pose from the travails of Neil Woodford.

One other point to be aware of is the gearing. Borrowing to invest in additional assets can provide a real boost to returns when markets are rising, but can be detrimental if asset values fall. The levels of debt vary enormously between the different property investment trusts, with some having no gearing at all and others having in excess of 50%, which has a major bearing on their risk-return profile.

Top picks

The analysts at Winterflood recommend the £2.7bn Tritax Big Box (LON:BBOX), which invests in large logistics facilities in the UK. It has performed well since it was launched in December 2013, with an annualised NAV total return of 13%; this is well ahead of its nine percent yearly target.

Winterflood expects there to be strong demand for the sort of ‘big box’ assets that the fund invests in, which, in combination with the significant element of inflation linkage and fixed uplifts, should continue to provide scope for further rental growth. This is supported by the high weighted-average, unexpired lease term.

Tritax shares have generated a NAV total return of 36% in the last three years, but the recent interim results were disappointing. The shares are available on a discount of two percent and offer a prospective yield of just under five percent that is fully covered by earnings.

Winterflood also recommends the £1.6bn TR Property Investment Trust (LON:TRY), whichis unusual in that it mainly invests in property company shares rather than the actual bricks and mortar. Winterflood also likes the fact that it benefits from an experienced and well-resourced management team that has a strong, long-term performance record. 

Investing in property shares enables the fund to be more diversified and makes it easier to change the portfolio to take advantage of the best opportunities. At the end of June, it held around 60 different securities that provided exposure to UK and European property markets and there was also a 7.9% investment in bricks and mortar.

TR Property has returned 92% over the last five years and is yielding three percent with the shares trading on a two percent discount. The ongoing charges are a reasonable 0.69% and the net gearing is a modest 13%.

A different type of exposure 

Numis recommends LXI REIT (LON:LXI), which raised £175m when it floated in October 2018. The money has been invested in a portfolio of secure, long-dated and inflation-linked leases with the aim of generating an NAV total return of eight percent per annum.

LXI recently raised a further £200m that has been used to acquire a diversified portfolio containing new Lidl stores, a BUPA care home and a Premier Inn that offer a combined net initial yield of 5.74%. The fund’s assets are all let and have a weighted-average unexpired lease term to the first break of contract of 22 years, with 97% of the rental income benefiting from index-linked or fixed uplift reviews.


Numis says that the manager buys well, crystallises profits and recycles the capital quickly, driving attractive returns ahead of its eight percent per annum target. This is reflected in its 14% premium to NAV, although even at this level the shares still offer a prospective yield of 4.5%.

Investec Securities has a buy recommendation on Schroder Real Estate (LON:SREI) because of its sectorial positioning and the fact that the shares are available on a 16% discount.The company has a 36% allocation to offices, with 32.7% in industrials and 24.5% in retail, with the balance invested in other areas.

At the end of June, the underlying portfolio comprised 43 properties valued at £461.1m, with a rent roll of £26.8m per annum. The net initial yield is 5.4% and the average unexpired lease term, assuming all tenants vacate at the earliest opportunity, is 6.1 years. SREI’s shares are yielding 4.6%, with the dividends fully covered by earnings.

Safe and secure

The Secure Income REIT (LON: SIR) invests in a mixed portfolio of hotels, leisure and healthcare assets. The three main tenants are Ramsay Health Care, Travelodge and a consortium of private equity investors that recently bought the theme-park operator Merlin Entertainment. The latter accounts for around a third of the company’s total rent roll, but the new buyers are long-term investors; the average term to expiry of the relevant leases is 23.5 years without a break clause.

In July the fund announced the sale of eight out of the 19 private hospitals let to Ramsay Health Care to a US specialist healthcare REIT at a 19% premium to NAV. The proceeds will be used to repay debt with the net loan-to-value (LTV) ratio falling to 33.5%. Secure pays a fully covered dividend equivalent to a yield of 3.9% on the current share price. 

Numis says that the fundhas an enviable track record since listing in June 2014, with NAV total returns of 20.9% per annum and annual share-price returns of 20.6%. Numis also believes that the portfolio is robust and likes the fact that the management team has a strong alignment with shareholders, with a 13.4% stake worth around £173m. The shares are currently trading around NAV and the fund remains on their buy list.

Their other core buy is the PRS REIT (LON:PRSR). It offers a pure play on the private rented sector, providing newly constructed homes for middle-income families paying rent at market levels. Numis believes that this is an attractive area of the property market, well- aligned to the government’s ambition to deliver more affordable family homes.

PRS targets a total return of 10 percent per annum, which includes a targeted dividend yield of 5.5% that is paid quarterly and should rise in line with inflation. The shares are currently trading close to NAV and are below the issue price at IPO. This is partly because the fund is paying an uncovered dividend as the home developments pass through the construction phase.

Trading buy

One of the real bargains in the sector is Stenprop (LON:STP), which is trading on a 23% discount and paying a fully covered yield of 6.1%. It is currently in the process of transitioning to become a specialist UK multi-let industrial (MLI) property company and these assets now make up around 43% of its portfolio by value.

During the financial year to the end of March, the fund completed the sale of 23 properties, all above book value. This included the disposal of seven of its eight sites in Switzerland, 14 Aldi properties in Germany and the last remaining places in central London. The proceeds after repaying the associated debt were reinvested into 30 MLI estates that the manager says were at a 50% discount to their estimated replacement cost.


Stenprop aims to increase the UK MLI component of its portfolio to at least 60% within the year to 31 March 2020 and then to 100% in the following two years. This will require the disposal of around £140m of property, with the proceeds being used to buy about £100m of MLI assets. Numis rates the company as a trading buy and believes that the use of share buybacks could provide a potential catalyst for a rerating prior to the completion of the transition.

The weakness in the retail sector and Brexit-related uncertainty have weighed heavily on the performance of REITs in the last few months. It now looks likely that Brexit will come to some sort of resolution by the end of October. If this is the case, the volatility in the coming weeks could provide some highly attractive buying opportunities.

Profiting from structural trends

Ben Yearsley, a director at Shore Financial Planning, recommends the £289m Warehouse REIT (LON:WHR), whichowns a portfolio of multi-let warehouses located near the end users. These are an essential part of the logistics supporting the growth of online shopping. He says that the fund is geographically diverse, with a manageable LTV ratio of around 40%, and has a 6% yield that is fully covered by earnings. The shares are available on a four percent discount.

He also likes the £472m Target Healthcare REIT (LON:THRL). It owns more than 50 modern, purpose-built UK care homes to help cater for the ageing population. It has a fully drawn down debt-to-equity ratio of 28% and is yielding 5.75%, which is not quite covered by earnings. The shares are trading on an eight percent premium. 

FUND OF THE MONTH

Standard Life Investments Property Income (LON:SLI) has delivered consistently strong performance and has a high weighting to industrial property, which bodes well for the months ahead. As well as targeting capital growth, manager Jason Baggaley also prioritises the security of income and has managed to achieve an attractive five percent yield that is fully covered by earnings.

Baggaley, who has run the fund since 2006, actively manages the portfolio’s assets to help drive capital growth and improve the security of the income stream. He has consistently been able to add value in this way, which is an important factor given that base returns are likely to be weaker in the period ahead.

The manager expects a low-return environment over the next three years for the commercial real-estate market, with total returns of just 1.9% per annum over the period 2019-21. He also thinks that the current wide spread in the sector-level returns will endure in the short term, with industrial strength and retail weakness both driven by structural trends.

Given this backdrop, it is reassuring that at the end of March the fund had a 52% exposure to industrial properties, with offices accounting for a further 32%. Retail made up just 2% of the assets, although an additional 7% was invested in retail warehouses.

Over the last five years the fund has generated an impressive NAV total return of 73% that is well ahead of both its benchmark and peer group, with the portfolio well-positioned for the tougher conditions ahead. The shares are trading on a small two percent premium to NAV, which reflects their strong track record and they are recommended by both Investec Securities and Winterflood.