Complete your registration today for a chance to win £50 John Lewis vouchers in our weekly draw Enter now
David Kimberley
View profile
Updated 09 Apr 2024
Save Article Download

Disclaimer

Disclosure – Non-Independent Marketing Communication

This is a non-independent marketing communication commissioned by Picton Property Income. 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.

There can be a tendency among investors to see property investments as unchanging. A residential building today is going to be a residential building tomorrow. If that building falls in value, then there isn’t much the owner can do about it.

Reality is more nuanced and real estate is regularly repurposed to meet occupier demands and increase investor returns. You only have to look at some of London’s major commercial and residential hubs to see that’s the case. As recently as the early 1980s, much of the London Docklands area contained just that – docklands, alongside some warehouses, and lower end residential properties.

Today it contains large office buildings, leisure and shopping facilities, as well as a mix of residential properties. Further west, Battersea Power Station has been changed from an industrial site into residential, retail, and leisure real estate.

Changes in working behaviour, notably the shift to working from home, mean even now there are questions about whether office blocks in places like Canary Wharf will shift once again into more in-demand residential properties.

The point is that real estate is not as static an asset class as it may seem at first glance. Moreover, properties can be repurposed in such a way that it proves accretive to long-term returns for investors. Picton Property Income’s (PCTN) holdings provide some good examples of this.

PCTN is an internally managed REIT which invests in a diversified portfolio across UK commercial real estate. The fund currently has 49 holdings, with close to 60% invested in industrial assets and more of a skew, on a regional basis, towards London and the Southeast.

The managers do not try to quickly shift into whatever asset class in the sector is performing well. Instead, they will try to make their current holdings ‘work’ as much as possible, by maintaining high levels of tenant retention and generating long-term returns.

More recently that has meant repurposing holdings in the office sector, which is seeing lower demand, into alternative use properties. The most notable example of this is the REIT’s holding in Angel Gate, an office asset in central London.

In October of last year, PCTN received full permission from local authorities to repurpose the asset into residential properties. The site was put up for sale in January, with PCTN now able to realise the maximum value from the asset.

It was a similar story with Longcross, an office building in Cardiff. PCTN has agreed to sell the property to a specialist student accommodation developer. The transaction is subject to planning permissions approval and the sale price will be based on how many rooms can be built under those terms. However, its sale will be accretive to PCTN’s NAV, even if permissions are only given for the minimum number of rooms permitted.

Two other assets in the PCTN portfolio are at an earlier stage in a similar process. For example, the managers have submitted a planning application for Charlotte Terrace, a building in West London that’s comprised of both office and retail space. The aim is to repurpose the asset into residential properties, fitting with a wider £1bn redevelopment that is happening in the area.

Outside of London but still in the South East, PCTN has received approval to amend an office building at Colchester Business Park for use by a healthcare provider.

As this all suggests, this means that real estate holdings can, within reason, be repurposed for a wide range of uses. The key point, from an investor’s point of view, is to ensure such repurposing generates positive returns.

PCTN’s success in repurposing its holdings is helped by the experience of the managers. As noted, PCTN is an internally managed REIT and CEO Michael Morris has over 25 years of experience in real estate investing.

Michael works alongside a team with extensive asset management, occupier services, and surveying experience, meaning the PCTN management have a solid understanding of planning policies, occupational demand, and how suitable a given building is for repurposing, all of which are vital to ensuring any changes to a property deliver returns for investors.

We think the proof is in the pudding in this regard given that the repurposing projects that have been completed or are in the process of undertaking look set to deliver strong investment returns for the REIT.

Despite these positives, PCTN was trading at a 34.4% discount as at 20/04/2024. Over 90% of PCTN’s debt is fixed until 2031 and it has dividend coverage in excess of 100%. The REIT also has the potential to benefit from a significant uplift in income from its portfolio, driven by fixed rental uplifts, leasing vacant space and resetting rents to market levels.

We think PCTN sits at an interesting juncture as a result. The REIT enjoys rental growth potential, is not subject to a high level of refinancing risk, and already has excess dividend coverage. We think the wide discount and potential for rate cuts, alongside the positive returns generated from asset sales, could suggest a more positive outlook for the trust in the months ahead.

Press continue to read the full article...

Kepler Trust Intelligence provides research and information for professional and private investors. In order to ensure that we provide you with the right kind of content, and to ensure that the content we provide is compliant, you need to tell us what type of investor you are.

Continue

Welcome to Kepler Trust Intelligence

Please enter a valid email address
{{item.msg}}
Please enter a valid password
{{item.msg}}
Please enter a valid email address
{{item.msg}}
Please check your email. If an account exists you'll be sent instructions on how to reset your password.
To ensure that we are able to provide content which is appropriate for you, please tell us a little about yourself.
Please choose an option
{{item.msg}}
Please enter a company name
{{item.msg}}
Please enter a location name
{{item.msg}}
Please choose an option
{{item.msg}}
Please enter a platform
{{item.msg}}
Please choose an option
{{item.msg}}
Please enter a trust
{{item.msg}}
?
The information contained herein is not for distribution and does not constitute an offer to sell or the solicitation of any offer to buy any securities in the United States to or for the benefit of any United States person (being residents of the United States or partnerships or corporations organised under the laws thereof). The investment funds referred to herein have not been registered in the United States under the Investment Company Act of 1940 and units or shares of such funds are not registered in the United States under the Securities Act of 1933.
Please confirm
{{item.msg}}
Please select an option
{{item.msg}}
See benefits
A free Kepler Trust Intelligence account allows you to access premium content including the ‘Kepler View’ – our verdict on the trusts we cover – and historical research so you can see how our view has changed over time. An account also unlocks useful facilities like the ‘follow’ button which lets you keep track of the trusts you’re interested in and as a logged in user you can also download PDFs of our research, and choose the layout of the page you’re reading to suit your preference. We will not share your details unless you give us permission to do so, and we won’t bombard you with emails – we only send one a week.
Please select an option
{{item.msg}}
Please enter your first name
{{item.msg}}
Please enter your last name
{{item.msg}}
Please enter a valid email address
An account already exists with this email - have you forgotten your password?
{{item.msg}}
Please enter a valid password
{{item.msg}}
Please enter a valid password
{{item.msg}}
How will this information be used? Your answers help us to tailor our content to relevant investment trusts, and to ensure that the asset allocation and portfolio strategy research we produce is appropriate to our userbase.
Our Website uses Cookies Cookies are small text files held on your computer. They allow us to give you the best browsing experience possible and mean we can understand how you use our site. Some cookies have already been set. You can delete and block cookies, but parts of our site won’t work without them. By using our website you accept our use of cookies. For further information please refer to the Kepler Privacy Notice.
Need help?

One more thing...

Did you know, you can 'follow' individual trusts on Kepler Trust Intelligence? Use the functions below to set up alerts and we'll send you research and updates on your chosen trusts.

Suggested trusts to follow

Browse all funds
Need help?
Current Site Kepler Trust Intelligence is produced by the investment companies team at Kepler Partners and is the UK’s premier source of detailed qualitative research on investment trusts. Absolute Hedge is a market leading UCITS research database providing proprietary research on funds, themes and strategies in the UCITS space. Kepler Liquid Strategies is a Dublin domiciled UCITS fund platform featuring a number of best-of-breed fund managers. Kepler Partners is a corporate advisory and asset raising boutique specialising in the regulated funds market in Europe and investment trusts in the UK.