UK Commercial Property REIT 09 December 2019
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.
UK Commercial Property REIT (UKCM) is the largest generalist commercial property vehicle in the AIC UK Commercial Property sector. Managed by Will Fulton at Aberdeen Standard Investments, it owns a portfolio strongly tilted to the industrial sector and to properties benefiting from technological and demographic change. ESG considerations also feature prominently in investment and asset management decisions.
Since Will took over control of the portfolio in 2015, the trust has been moving away from a standard retail/office/industrial strategy and embracing more specialised areas such as logistics and distribution. Furthermore, this year shareholders have approved a wider investment policy which allows the manager to invest across a broad range of ‘alternative’ real estate sectors. These are areas outside the mainstream industrial, office and retail sectors, and which are often the greatest beneficiaries of secular changes in society.
UKCM yields 4.2% and has seen its dividend cover improve in 2019, with strong reversionary potential in the portfolio which could provide a further improvement, as we discuss in the Dividend section.
The trust has one of the lowest levels of gearing in the peer group, which reflects Will’s cautiousness about current volatility and desire to keep cash on hand to take advantage of that volatility.
We believe that Will has prudently positioned the portfolio in the four years since he took over, making this a stand-out option for investors seeking broad exposure to the UK property market. The trust is well positioned in the sectors which are benefiting the most from changes in society and commerce. It also has lower exposure to the troubled retail sector – just 23% as of the end of September 2019, down from 43% when he took over, with that to fall further following the sale of the company’s last shopping centre.
Furthermore, the combination of unused gearing and cash due from recent transactions means UKCM has ~£110m of capital to invest when opportunities arise, and is arguably less exposed to any economic slowdown than its peers. Apart from the political uncertainty around the general election and Brexit process, the economic cycle seems long in the tooth, and so we believe it is prudent for investors to be cautiously positioned. We believe the attractions of this positioning are reflected in the discount of 4.3%, which is narrower than many of its peers, some of which are trading on double-digit discounts. The sheer size of the trust is also a benefit, meaning the shares are more liquid and the manager has greater flexibility to conduct larger transactions.
As well as the strategy of investing in sectors benefiting from social and technological trends, another form of ‘future proofing’ is seen in the prominence given to ESG considerations. UKCM has an established approach to embed ESG in its investment process, and is therefore well positioned with a growing number of investors looking for funds with a strong ESG ethic and impact.
In our view, this year’s expansion of the investment policy to allow further investment in alternatives is also welcome. Although we note Will’s comments that some alternative sectors are looking expensive, it is clear that there are some specialist areas of the property market which are benefiting from demographic changes and shifts in how we live and work, offering better prospects for capital and income growth than many parts of the traditional retail and office sectors in particular.
|A portfolio tilted to the top-performing and resilient industrial sector
|The yield is below the sector average
|Improved dividend cover and reversionary potential mean the dividend looks secure
|Whilst an underweight, the retail exposure continues to drag down NAV total returns
|Low levels of gearing reduce the exposure to volatile markets and increase the ability to be opportunistic
|Political uncertainty in the UK could lead to volatility in property values and the discount