Manager of £1.4 billion UK real estate company confident he can invest £130 million cash pile wisely in the post-‘Brexit’ downturn.
The £1.36 billion investment company beat its MSCI Balanced Monthly & Quarterly Funds benchmark in the six months to 30 June, logging a 2.8% total return, with income reinvested, versus the index’s 2.6%,
Net asset value (NAV) per share dipped 0.2% to 86.5p, hit by the Budget hike to stamp duty and the loss of BHS as a tenant in Swindon.
This was better than the FTSE Real Estate Investment Trusts index which fell 11.8% although the trust’s own shares dropped 13.4% as investors rapidly reduced their exposure both before and after the referendum.
Selling of the stock saw the discount to net asset value widen to 16.6% by the end of June. This has subsequently narrowed to 10% with the shares down 6% year to date compared to a 3% gain in NAV.
The manager of the trust, Will Fulton of Standard Life Investments, said that although the slowdown in UK commercial property was in motion before the EU membership vote the impact of ‘Brexit’ was not yet over.
‘We anticipate increased pressure on UK commercial real estate capital values due to elevated investor caution and the expected weaker economic environment,’ he said.
‘We expect central London offices to be the most negatively impacted over the medium term, given the linkages to European markets.’
Fulton conceded that although he may have jumped the gun on his underweight to the sector – 1.7% versus the 11% benchmark – it did not ‘materially hurt’ returns.
Despite the slowdown in the UK economy, he remained positive about prospects with around £70 million of cash freed up from the pre-referendum sale of two London properties on a 14% gain backed by £50 million of an undrawn credit facility. The company has low net gearing of 10.7% and pays just 2.89% on its debts, with Fulton confident he could find new investments with a greater rate of return than this.
The manager identified the trust’s industrial holdings – which contributed a 4.8% total return in the first half versus their 3.5% benchmark – as a key area moving forward.
He expanded: ‘The prime characteristics of the company’s portfolio will stand it in good stead with both “big box” and “multi-let estate” well-placed to continue providing sustainable income while offering some growth opportunities.’
Fulton said he was on the look-out for bargains that might be thrown up bysuspended open-ended property funds selling assets in order to generate cash for investors.
His comments came after the world’s biggest sovereign wealth fund said it had written-down the value of its British property holdings by 5%. Norges Bank Investment Management, which runs Norway’s £681 billion oil-derived state fund, warned of the ‘considerable uncertainty surrounding the outlook for UK property following the EU referendum result.
Fulton said: ‘We will continue to review opportunities in South East offices – modern, well-let properties in strong locations to limit the impact of depreciation on returns – but only if an element of “re-pricing” has occurred to offset lower rental growth expectations,’ he said, highlighting hotels and supermarkets as prospective targets.
This ‘re-pricing’, he continued, may extend across additional sectors. ‘We are also open to exploiting pricing opportunity in the market, across most sectors, with a large team and the resource to react quickly. The property market has been experiencing an immediate post-referendum bout of pessimism together with a liquidity pinch and we expect there will be other points of stress over the next six-to-12 months as “Brexit” sentiment waxes and wanes.’
UKCM paid two interim dividends during the half year, maintaining the combined pay-out at 1.84p per share. The trust yields 4.8%.
SOURCE: Citywire
