UK Commercial Property REIT 26 April 2022

UK Commercial Property REIT (UKCM) aims to offer exposure to sectors and properties in the UK commercial property market which are benefitting from structural changes in the economy and society. The portfolio is mostly invested in the industrials sector, with significant exposure to logistics, which has been a source of strong performance through the pandemic.

In the most recent quarterly results, the dividend was increased from 0.46p per share for Q4 2020 to 0.75p per share for Q4 2021. As we discuss under Dividend, recent investments are due to see income received rise this year with the prospect of a further boost when the manager deploys its remaining £88m of capital available for investment, mostly through unused gearing, meaning we believe prospects for income growth are good. Roughly 26% of the income is either explicitly linked to inflation or has fixed uplifts agreed in the contract, which could be significant in a period of high inflation.

UKCM’s low gearing and advantageous sector positioning led it to perform steadily during the pandemic, and be rewarded with a narrow discount versus its peers. However, the discount remains wide at c. 10% at the time of writing. Annualising the most recent dividend gives a yield of 3.3%, but this does not take into account the possibility for income growth.

UKCM has been managed by Will Fulton since 2015. Kerri Hunter was appointed interim manager in September 2021 as Will sought treatment for a medical condition. Kerri reports a strong pipeline of ideas for the uninvested funds, in industrials, retail warehouses and modern offices. As we discuss under Portfolio, the trust has used abrdn’s extensive resources to take on development or asset management projects which should boost the income earned on the portfolio and its market valuation.

UKCM is in a strong position following prudent management of the portfolio in recent years. The portfolio is strongly tilted to the outperforming areas of the market, chiefly industrials and retail warehouses. It also has low gearing compared to its peers and Kerri has plenty of firepower to put to work. The board has taken a prudent approach to the dividend and has not reflected in the current payout income growth which will be received when development projects are completed this year. This alone will provide a boost to the revenue account, notwithstanding any new investments still to be made. While the current yield is not high relative to the peer group or the real assets trusts, we believe the prospects for income growth are very good, and there is real momentum behind the portfolio as commercial property prices recover from the impact of the pandemic and associated lockdowns.

We think commercial property has many of the attractions of other real assets trusts: for example, inflation-linkage, either explicit or implicit in rents which feeds through into valuations, strong asset backing, with plenty of diversification by sector and geography, and some sectors being the beneficiary of long-term structural changes in the economy and society. On the other hand, it is potentially more sensitive to the economy. However, UKCM is available on a wide discount, compared to high premiums on some real assets trusts and on specialist logistics portfolios.