Baking up an investment portfolio
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With interest rates stuck at record lows and dividends under pressure, the search for investment income has become harder than ever. Fortunately, bonds have seen their yields improve, offering one alternative for investors, but what about commercial property?
Traditionally, the asset class has provided a stable stream of income, but with shops, hotels and leisure centres shut, car show rooms only slowly opening, and question marks over the future of office spaces, is it still a viable choice?
Five Elite Rated managers give their views.
Marcus Phayre-Mudge, co -manager, BMO European Real Estate Securities
“What’s been fascinating is the difference in performance at the subsector level. The market has been really quite positive about those sectors where the income has been secure, probably index-linked, and where landlords have been able to recover the rents from tenants. And the most obvious sectors that have enjoyed that are healthcare, nursing accommodation, supermarkets, logistics and industrial property. Importantly, we think these sectors will pay their full dividends.
“And of course, at the other end of the scale, the consumer facing real estate like bars, restaurants, hotels, shopping centres, et cetera have suffered and the rent collection records there have been extremely low. I remain very nervous about retail.
“When it comes to offices, over the last 15 to 30 years of my career, the amount of space per worker has gotten smaller and smaller. We expect this to reverse. And even if more people are working more from home, they’ll still want to be in the office at some point and have a desk. But hot-desking won’t be possible. So, at the moment it’s really up in the air.”
Listen to an in-depth interview on the opportunities in property securities on this podcast
Alex Ross, manager, Premier Pan European Property Share
“The majority of retail focused UK REITs have perhaps unsurprisingly cancelled or suspended dividends to preserve capital. The notable exception was Supermarket Income REIT, which paid its quarterly dividend from its very secure income stream – it has an underlying asset of long leased supermarkets let to Tesco, Sainsburys, Morrisons and, most importantly to us, their selectively acquired supermarkets also act as fulfilment centres for (rapidly increasing) online grocery orders.
“Rent collections for the office specialists has also been comparatively strong in our European holdings, supported by the focus towards modern, prime offices let to leading international corporates in the major capital cities.
“There is increasing commentary on expectations for the current enforced working from home to lead to more permanent home working and the impact that may have on longer term office demand. We expect corporates to require fewer workstations in their office space ahead, but in many cases, this won’t necessarily lead to less space required, just better quality space. As such, we expect there to be a material divergence in rents between the dynamic and flexible grade A buildings, which are also highly energy efficient, relative to the large floorplates of generic office buildings as often seen in the City or Canary Wharf”.
Matthew Stanesby, Close Managed Income
“We’re trying to steer clear of retail and we don’t have a great deal in office space. Instead, we’ve gone for the two specialist areas we think are probably fine through this sort of crisis. One of our holdings specialises in leasing to the likes of Costa and other very strong tenants on a 25-year view, with inflation-linked uplifts to payments. The other holding we’ve got invests in industrial properties. For example, it essentially owns a car park in the Midlands – not a town centre car park, but one new cars get shipped and stored in.”
Listen to where else Matthew is finding income opportunities on this podcast
Dr. Niall O’Connor, Brooks Macdonald Defensive Capital
“The team has stress tested different scenarios for different REITs (real estate investment trusts). Of all the areas covered we like logistics and warehouses and student accommodation. The former could benefit from businesses looking to have multiple supply chains closer to home and the need for more storage space. There may be a short-term hit for the latter, but students will return, and foreign students will still want to go to British universities.
“When it comes to offices the knee-jerk reaction is that we’ll work from home more and therefore less office space will be required – or we’ll want satellite offices and London may suffer. Where office space is used, more space may be needed to deal with social distancing and hot-desking is no-go at the moment – people won’t want to sit at a desk occupied by someone else the day before. So, we’re avoiding this area at the moment until the outlook becomes clearer.”
Sid Chand Lall, manager of UK equity income fund Marlborough Multi Cap Income, has also invested in property related equities.
“We added to our existing holding in Supermarket REIT through what was an oversubscribed equity placing. It raised c.£140m (versus an initial plan for £75m) to buy at a cost of £115m two supermarket sites with distribution centres. The surplus raised allows the REIT to continue working on a pipeline of other distribution centres worth a further £180m. There is no change to its dividend policy (paid quarterly) and rent collections on the existing portfolio are running at 100%.
“We wanted to support the Big Yellow placing but found the discount was just too small at 1% to the previous market close. Given market volatility and our already large holding (Big Yellow has been a top-five position in the fund for some time), we did not think it urgent to add to the position at such levels. However, it is reassuring that the company will maintain its dividend.”
Schroder Oriental Income
Managed by Matthew Dobbs, this trust has a 19.7% weighting to real estate (vs 6.1% for its benchmark)*. This includes two top ten holdings*: Kerry Properties Ltd, which is engaged in property development, infrastructure projects and hotel ownership and operations in Hong Kong, mainland China and the Asia Pacific region, and Fortune REIT, which holds a portfolio of 16 private housing estate retail properties in Hong Kong, comprising 3.0 million square feet of retail space and 2,713 car parking spaces.
Lazard US Concentrated Equity
This fund holds just 25 stocks, and 12% of the portfolio is in real estate (a weighting that is 10% more than the benchmark). Top ten holding* Public Storage is an American international self-storage company headquartered in Glendale, California. It is run as a real estate investment trust and has more than 2,200 self-storage locations in the US, Canada and Europe.
*Source: Fund factsheets, 30 April 2020