After a tough year, real estate investment trusts (Reits) are on a swift road to recovery as valuations rise and transactions reached 2018 levels.
Custodian (CREI), the £430m portfolio of industrial, office, and retail property, has reported a 6% total return including dividends in the second quarter with net asset value (NAV) of 101.7p per share at 30 June. The increase was driven by a boost to capital values in the ever-popular industrial assets held in the portfolio.
Over half of the fund is invested in industrials, with the remainder made up of a mix of assets such as retail warehouses, offices, drive-thrus, and car showrooms. While only 6% of the portfolio is in high-street retail, manager Richard Shepherd-Cross continues to cut exposure to this ailing part of the property sector, including the sale of a shop in Nottingham for £700,000.
Shepherd-Cross picked up a new industrial building in Liverpool over the quarter, paying £4.3m.
Activity in the UK commercial property sector in the first half of this year has reached levels last seen in the first six months of 2018, according to a report by estate agents Carter Jonas, with £20bn ploughed into the market.
‘Investment demand has been matched by occupier activity,’ said Shepherd-Cross.
‘In the industrial and logistics sector there is a depth of demand from a range of occupiers which, along with limited supply, restrictive planning and build-cost inflation constraining the pipeline of new development, is leading to sustained rental growth.’
Demand has been strong for regional office spaces as tenants prepare for post-pandemic working practices and retail warehouses are enjoying the benefits of pandemic-restricted shopping habits, said Shepherd-Cross.
‘While the pandemic has wide-ranging implications for real estate, the level of continuing demand support cashflow, which in turn supports a fully-covered dividend.’
Custodian declared a quarterly dividend of 1.25p, in line with its 5p full-year target. This offers a 4.9% yield with the trust, up 1.5p at 103.9p, the only one its UK general peer group to trade at a small premium over NAV.
The shares have jumped 20.1% year-to-date and the NAV has increased 1.8%, reflecting the growing optimism from the vaccine roll-out and economic recovery.
BMO offloads retail park
BMO Commercial Property (BCPT) also had a good second quarter with the £724m portfolio rising 4.4% – or 5.3% including dividends – to net asset value of 124.8p per share.
At 92.5p, up 0.8p today, the shares languish 25% below NAV, one of the widest discounts in the sector, although they have rallied in from a 40% deficit at the end of March.
Growth was strongest in the industrial and logistics sector, which makes up 22% of the portfolio, where values rose 10.7%. Bearing out the positive views of Ediston Property (EPIC), which is increasing its concentration on retail warehouses, the Reit has also seen a recovery in retail parks, enjoying a 7.2% gain in the quarter on the £19m sale of one in east Kilbride for £19m.
The trust has been busy managing its assets, including lease extensions, taking on new tenants, and undertaking work to update retail park shop frontages.
Fund manager Richard Kirby said the ‘pricing of quality assets’ within retail warehousing has ‘started to improve’.
‘This is underpinned by rebased rents and resilience within this retail sub-segment, which has been demonstrated throughout the pandemic,’ said Kirby.
‘We are now seeing increased activity in the capital markets with UK institutions an active buyer in this space.’
BMO’s flagship retail asset, St Christopher’s Place, a 150-unit property in London’s Oxford Street let to shops, bars, and restaurants, continues to be a drag. The asset had been a hinderance during the pandemic as restrictions shut down business, with the tenant owing nearly £1m in rent at one point, and over the past quarter fell 0.6% in value.
Kirby said there will need to be a ‘meaningful return of office workers and international travellers’ to see pre-pandemic activity levels return.
Dividends continue to be paid at 0.35p per month, offering a 4.6% yield. Liberum analyst Conor Finn said there was scope for an increase as dividend cover from income was 1.4 times in the quarter. ‘Rent collection in Q2 was 92.8% and the combined rent collection over the last five quarters is 90.3%,’ he said.
NewRiver toasts pub sale
Leisure asset specialist NewRiver Reit (NRR) yesterday sold its Hawthorn pub business for £222.3m – more than double what it paid for it just three years ago.
The £317m Reit, which specialising in buying, managing, and developing retail and leisure assets, agreed to sell Hawthron Leisure Reit – the parent company of its community pub business – to the owner of Admiral Taverns.
The sale is part of the trust’s strategy to pivot into ‘essential retail’ after the pandemic. The trust, a former favourite of failed fund manager Neil Woodford, had already struggled with the demise of the high street when Covid hit, with its shares tanking 68.4% over a six-week period in the depths of the crisis.
This led to the decision to divest its pub business, which it bought in 2018 for £107m.
Allan Lockhart, who founded NewRiver with his father David, said the Reit had grown Hawthorn ‘to become the UK’s leading community and wet-led pub business’.
‘As a consequence of this, we received significant interest from a range of potential buyers for Hawthorn,’ he said.
‘We have now agreed the sale of Hawthorn, which once completed, will deliver on our key priority to reset loan-to-value, strengthening our balance sheet, and enabling us to focus on executing our resilient retail strategy.’
The shares firmed 0.7p to 88.5p today, up 48% in the past year but a fraction of their 360p peak on September 2017.
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