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Fund Profile

UK Commercial Property REIT 05 December 2022

Disclaimer

Disclosure – Non-Independent Marketing Communication

This is a non-independent marketing communication commissioned by UK Commercial Property REIT. The report has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on the dealing ahead of the dissemination of investment research.

Overview
UKCM’s high-quality portfolio is delivering income growth even as capital values wobble…
Overview

UK Commercial Property REIT (LON:UKCM) is intended to offer exposure to a portfolio of high-quality commercial property which is tilted to areas being supported by structural developments in the UK economy. Two key trends expressed in the current portfolio are the growing importance of logistics and distribution properties to modern economies, and the critical importance of high ESG standards to owners and occupiers.

Lead manager Will Fulton and the board have tended to take a prudent, cautious approach, which means UKCM has one of the lowest levels of Gearing in the peer group. Debt is largely fixed, with a low blended interest rate of 3.16%. These are strengths in a troubled environment for property, such as the one we are in.

Property values took a hit in Q3 2022 as the impact of higher interest rates and gilt yields began to be felt in valuations. UKCM has been hurt by a high exposure to the industrials sector, which was the lowest yielding entering the crisis. Will thinks the outlook for rental growth is still strongest in this sector, which could support UKCM’s dividend through any recession. In fact, a number of significant regearings of leases and rental uplifts were achieved during the quarter even while capital values fell (see Portfolio).

UKCM’s dividend was 96.9% covered for the year to 30 September 2022, with the revenue cover shrinking in Q3 following some exceptional costs, an increase in the cost of the floating rate debt and the sale of an income-generating asset during that quarter. However, new income is due to come on stream in this quarter and the next from assets that have been in development, which should repair some of the gap. Annualising the latest dividend, the yield on the current share price is 5.6%. As markets have reacted to rising interest rates, UKCM has been pushed onto a wide discount of 40.1%.

Kepler View

The immediate outlook for capital values in property is not good, with the consensus amongst the managers we speak to being that there will be further falls to come. This is because property markets operate with a lag, and will slowly incorporate the significance of higher interest rate expectations. However, we believe investors turn to commercial property for income, and if there is a path to the restoration of capital over the medium term, then UKCM’s dividend yield of 5.6% with the potential for growth over the medium to long term looks attractive.

Calling the bottom of the market is fraught with danger and we would not attempt it. However, we believe that when inflation has decisively peaked and expectations for interest rates start to fall, then valuations should turn positive. In the meantime, UKCM has some features which should make it more resilient than peers: a focus on high-quality assets, comparatively low levels of gearing, and strong operational characteristics entering the current recession of 99% occupancy and 98% rent collection . We note that a 40.1% discount to NAV already prices in a fall in the ungeared NAV of c. 33%.

Bull

  • A portfolio tilted to the resilient industrials sector, which has strong structural support
  • Conservative gearing position provides resilience in tough times
  • Scope for dividend growth from the portfolio and projects in development

Bear

  • Commercial property is likely to see further falls in value as rising interest rates affect market pricing
  • Dividend is uncovered
  • Concentration in industrials is high, creating exposure to any down market
Continue to Portfolio

Fund History

26 Feb 2024 Strong rental growth underlines the attractions of the right commercial properties
Even as property values fell again in Q4 2023, rental growth in 2023 was positive across all the main sectors of commercial property…
05 Dec 2023 Don’t Panic!
Our analysts look for value against a backdrop of bombed out investment trust discounts…
29 Nov 2023 We need to talk about discounts
Discounts are the problem and the solution…
22 Nov 2023 Built to last
UK commercial property trusts have weathered a fierce storm, but our analysts think their fortunes may already have passed a nadir..
08 Nov 2023 Once more into the breach?
With yawning discounts across the board, some sectors have been hit harder than others - our analysts think there could be value there for those with the sangfroid to fight for it...
14 Nov 2023 Balanced Commercial Property and UK Commercial Property REIT
Dan Walsgrove and Will Fulton
Rewatch this webinar which is part of our November online event 'Discounted opportunities in a tough market'...
Watch Recording
31 May 2023 Dazed and confused
Property discounts remain stubbornly wide. Why is that and what would make them start to narrow?
24 May 2023 Five alternatives for income investors
Watch the presentations from our event focused on trusts delivering income via a diverse range of strategies…
19 May 2023 UK Commercial Property REIT
Will Fulton
Rewatch this webinar from our online series in May 'Alternatives for income investors' hosted by the team at Kepler Trust Intelligence 15-19 May…
Watch Recording
22 Mar 2023 Good vibrations
We identify some sectors with structural discounts we think could close over time…
02 Mar 2023 Podcast: Trust Issues #12 - Valuations, discounts and rent increases, with UKCM's Will Fulton
We speak to the Abrdn manager about the state of commercial property...
05 Dec 2022 Fund Analysis
UKCM’s high-quality portfolio is delivering income growth even as capital values wobble…
08 Jun 2022 Safe as warehouses
We look into the attractions of the often-overlooked commercial property sector…
04 May 2022 Time to change the record
We ask whether equities can still offer meaningful diversification or whether investors need to turn to alternatives…
26 Apr 2022 Fund Analysis
UKCM looks well-placed to grow the dividend this year and further on…
09 Sep 2021 Fund Analysis
UKCM is in a strong position to take advantage of post-pandemic opportunities...
30 Mar 2021 Fund Analysis
UKCM has weathered the pandemic, and now has cash to invest for income growth…
17 Mar 2021 After the storm
We look at the outlook for dividends in the UK commercial property sector and consider how the portfolio of the future will look after COVID…
26 Aug 2020 Fund Analysis
UKCM’s portfolio is well set up to be resilient to the current downturn…
10 Jun 2020 Pick your poison
We try to identify the best compromises between yield, value and security in the property sectors…
09 Dec 2019 Fund Analysis
UKCM is well positioned to take advantage of property market volatility…
21 Mar 2019 Fund Analysis
A commercial property trust focused on sectors and locations benefiting from structural change in society and the economy...
13 Mar 2019 Carry on doctor
With a sector average yield of 4.5% and a highly differentiated risk profile, the primary healthcare sector could be a healthy addition to the property portfolios of income-hungry investors...
28 Nov 2018 Fund Analysis
UKCM aims for an attractive income with the potential for income and capital growth from commercial property investments.
14 Nov 2018 Future shock
How the commercial property sector is coping with widespread disruption caused by the rise of the internet...
16 Oct 2018 The Investment Trust Advantage
Our recent conference for discretionary fund managers saw some of the UK's leading fund managers discussing the outlook for the world's major regions and asset classes...
29 May 2018 Fund Analysis
UK Commercial Property Trust (UKCM) is a large and liquid portfolio of commercial properties that aims to generate an attractive income with the potential for capital growth...
22 Mar 2018 Property income: opportunities for growth during structural change
Standard Life Investments' Will Fulton thinks income will play an important role for property investors in 2018 as capital growth continues to wane...
30 Oct 2017 Fund Analysis
A conservatively managed UK property trust with a focus on industrial and defensive, dominant ‘out of town’ retail properties
30 Oct 2017 Bricking it
As equity income stocks continue to soar, we examine commercial property as an alternative for those who fear a correction is imminent...
08 Aug 2016 New fund research for August
We identify four investment trusts which stand our for different reasons and examine them in detail...
08 Aug 2016 Hot property
We examine the battered property sector in the wake of Brexit and highlight three trusts which we think are worth a closer look...
08 Aug 2016 Fund Analysis
View all

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