Balanced Commercial Property 27 September 2022

Balanced Commercial Property (BCPT) offers diversified exposure to the income and capital growth potential in UK commercial property via a large portfolio of c. £1.4bn total assets. Richard Kirby has managed the trust since launch in 2005, with a focus on identifying high-quality properties in prime locations. The trust was known as BMO Commercial Property Trust until the management company, BMO GAM, was bought by Columbia Threadneedle last year.

Over the past year, Richard has re-focussed the portfolio on industrial and retail warehouse properties and reduced the exposure to offices and standard retail. Richard believes that supply and demand dynamics continue to favour industrials and retail warehouses, as well as some specific alternatives such as student accommodation, which often offers inflation-linked income, and hotels. As discussed under Portfolio, Richard is being cautious with new investments in the light of some weakening in the market over the summer, but he continues to look for stock-specific opportunities to add to the portfolio, taking advantage of the dislocated market.

There was £86.4m of cash in the portfolio, as at 30 June 2022, of which £18.3m is committed to income-accretive redevelopment plans. Additionally, there is an undrawn £50m revolving credit facility. We note that buybacks have been soaking up a lot of cash in recent months. Despite the repurchases, and some positive quarters of performance, the Discount remains wide at 38%.

Most of BCPT’s long-term debt doesn’t need to be rolled over until the end of 2024, providing some security in a rising interest rate environment (see Gearing).

Post a strategic repositioning, BCPT looks to be in a stronger position. High dividend cover means that there is no immediate pressure to boost income, while Richard’s long experience in the market should stand him in good stead when it comes to finding value in a volatile and dislocated market.

BCPT’s portfolio has experienced several recent solid quarters of NAV growth and it is pleasing to see the flagship St Christopher’s Place property written up in Q1 and Q2 2022. That said, the economic outlook for the UK is gloomy, with most analysts expecting a recession. In such an environment, commercial property could see valuations fall. While a recession would be troubling for retail and office properties in particular, it is nothing like the challenge lockdowns were. As such, we think the current c. 38% discount offers considerable compensation for the risks and that BCPT could be an interesting contrarian buy at this level.

Additionally we note there is reasonable inflation protection offered in commercial property. Some leases have explicit RPI-linkage or contracted fixed uplifts and many others offer the ability for inflation-busting increases when re-geared or properties are re-leased. In our view, this provides an extra attraction in the current environment and is a notable advantage over bonds.