Fund Profile

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
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Overview

UK Commercial Property REIT (UKCM) is the largest generalist commercial property trust in the UK. Manager Will Fulton, of Aberdeen Standard Investments, has been progressively tilting the portfolio towards the industrials sector in recent years; which now makes up over 50% of the portfolio and has been more resilient to the impact of the pandemic.

This approach has helped portfolio performance to be reasonably resilient in the crisis, as we discuss under Performance. Will’s prudent reduction of gearing last year has also been beneficial, and UKCM has the lowest gearing of the generalist UK commercial property trusts. While the outlook for commercial property is cloudy, UKCM is on a relatively narrow discount of 20% compared to peers. We believe this is due to the low gearing and the sector positioning.

In April UKCM’s board exercised caution and reduced its dividend by 50%. On an annualised basis this dividend equates to a yield of 2.7%. However, as discussed in the Dividend section, the reduced payout has been very well covered by earnings, meaning we believe there could be scope for an increase – although we acknowledge the crisis has not passed.

Will’s strategy is to identify locations and properties benefiting from structural market changes, for example the continuing shift of retail spending from physical stores to online. The focus within industrials, therefore, is on the logistics and distribution sites used by online retailers and delivery services, plus multi-let industrial estates in and around London which are themselves often housing distribution activity. Another element to that approach is the attention paid to ESG considerations, both in terms of site selection and asset management.

Analyst's View

The board took a prudent, conservative decision to halve the dividend when the outlook for the pandemic was unclear in April. However the reduced 0.46p quarterly dividend was 1.6 times covered by earnings in Q2, with dividend cover of 116% for the half year. We think there could be scope for the final dividend of 2020 to be increased; although we acknowledge retailers and alternatives in particular could have a troubled second half too, and rent collection is unlikely to be close to 100%. Consequently we think the 2.7% yield may underplay what investors are likely to get in the short to medium term.

Will has done a good job in attempting to future-proof the portfolio. But he could not ‘COVID-proof’ it, as the lockdowns were the ultimate black swan event for commercial property. Clearly his positioning away from high street and shopping centre retail and towards logistics has been helpful, and we think UKCM is well positioned for a slow return to normality.

Alternatives have been a drag in the short term, thanks to the lockdowns, but we think the pressure on retail property is likely to remain. Moreover the move to turnover-based rents would reduce the stability of income for which property investors invest. As a result, we think the broadened investment mandate should be beneficial from an income perspective in the medium term; while the core industrials exposure should display more resilient capital values through the cycle.

bull bear
A portfolio tilted to the top-performing and resilient industrial sector Commercial property is sensitive to GDP and the UK is passing through a downturn which may be extended
Low gearing reduces exposure to volatile markets and increases ability to be opportunistic Unpredictable outlook for alternatives sub-sectors in the short term
Scope for dividend increase depending on progress of recovery in the next two quarters Tail risk of second lockdown could be damaging to rent collection
Continue to Portfolio

Fund History

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 discuss the 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...
15 Aug 2018 The income edge
Last year saw investment trusts soar in popularity among both retail investors and wealth managers. We examine why this has happened, as well as the structural advantages of investment trusts for income-hungry investors...
30 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...
02 Nov 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...
01 Nov 2017 Fund Analysis
A large, conservatively managed trust with a diversified portfolio of UK commercial property...
20 Oct 2017 Finding income that doesn’t depend on the FTSE
We highlight a number of trusts and strategies which aren't correlated to an index that these days seems to be defying gravity...
19 Sep 2017 Find secure income amid uncertainty
The recovery in commercial property which has taken place since the Brexit vote is set to continue, according to Standard Life Investments' Will Fulton...
30 Nov 2016 Property makes a comeback
Property trusts' share prices have surged since they were knocked for six by the UK referendum, but with little political progress the outlook remains uncertain...
15 Aug 2016 Hot property
We examine the battered property sector in the wake of Brexit and highlight three trusts which stand out for different reasons...
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