The undervalued fund profiting from a new generation of internet start-ups
Stenprop (LON:STP), a £340 million property investment trust that is listed in South Africa, has recently started trading on the London Stock Exchange. The dual listing makes it easier for UK investors to benefit as the fund repositions itself to take advantage of the UK Multi-Let Industrial market. These small, convenient units are attracting significant excess demand from a new generation of e-commerce entrepreneurs, yet the shares are available on a double digit discount to NAV and offer a prospective yield of 5.6%.
Multi-Lets are the unglamorous part of the sector that operate below the ‘big box’ distribution centres leased by tech giants like Amazon, and the medium-sized ‘single-let’ warehouses favoured by retailers. They are ideal for the huge number of start-ups spawned by the growth of e-commerce, yet there is a massive shortage of supply as the larger property companies find them too awkward to manage.
‘Serviced’ industrial model offers additional income streams
Stenprop aims to get around this by developing a ‘serviced’ industrial model that will offer more flexibility to its tenants and create additional income streams for the company. A key element of this is its online leasing tool that allows existing tenants to renew their lease and/or take additional space for periods of six weeks to three years, while also offering additional products and services.
The fund’s Multi-Let Industrial portfolio currently consists of 32 different properties that have been subdivided into 818 units with 520 separate tenants. It accounts for just over a quarter of the total rental income, with most of the rest being generated by office space and retail.
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Stenprop’s lower yielding property portfolio that includes holdings in London, Switzerland and Germany is in the process of being sold down. The aim is to re-invest £220 million of the proceeds into new multi-let holdings over the next two years, with the rest of the money being used to repay debt.
STP is a Real-Estate Investment Trust (REIT) and will pay a dividend that is fully covered by recurring earnings. For the financial year ended 31st March 2019 it is targeting the payment of 6.75 pence per share. With the shares currently trading at 120p, this would be equivalent to a prospective yield of 5.6%.
10% discount could narrow after London listing
Most of the other UK property investment trusts are trading on a small premium to NAV, but Stenprop is available at around a 10% discount. It is thought that the London listing will help to increase investor interest and push up the price.
Nick Greenwood, the well-respected manager of the Miton Global Opportunities trust (LON:MIGO), who has made his reputation buying out-of-favour investment trusts, has invested 2% of his portfolio in Stenprop shares. He has compared the situation to German residential property funds like Phoenix Spree Deutschland (LON:PSDL), where he has made an excellent return in recent years.
Stenprop looks like an interesting new opportunity that has the potential to generate significant income and capital growth, although investors need to be mindful of the risks associated with any major portfolio transition.
This sounds like a variation on the successful model adopted by Sirius Real Estate LSE:SRE) in Germany: buy a poorly-performing industrial and office estate within the seven main German conurbations, redevelop it by making better use of the space (in particular by creating lots of small office units on short flexible leases suitable for startups and tech companies), and manage the tenancy agreements, maintenance, rent collection and other add-on services using some sophisticated inhouse software to crank out much-improved profits. SRE combines traditional commercial letting – albeit a souped-up “serviced” version – with property development, and it’s proven to be a winning combination of steady income and a continuing series of one-off growth hits.
Stenprop appear to be focusing on the industrial and warehouse market rather the serviced offices supplied by the likes of WeWork and Workspace. What’s unclear from this article is whether Stenprop is basically a buy-and-hold operator or whether it has development ambitions too. A recent discussion of this market on Radio 4’s The Bottom Line (see https://www.bbc.co.uk/programmes/b0b52wkh) emphasised the lack of serviced office units in the UK, especially outside London, so there would seem to be plenty of opportunities for development.