Can property trusts replicate the 2009 discount-to-premium rebound?

Or will the returns now on offer from cash prove too tempting for investors seeking some safety?


The past week has seen the publication of 31 December 2022 quarterly results for most mainstream UK property investment trusts (Reits), and they do not make for encouraging reading.

As shown in the table below, on average, net asset values declined by 18.3% in the quarter on the back of a 14.1% fall in property valuations, which compares with a 15.6% fall in capital values for the MSCI UK Monthly Index, a widely used benchmark.

Q4 ’22
Q4 ’22
Price TR
Q4 ’22
Portfolio Valuation (like-for-like)
Q4 ’22
31 Dec ’22
Dividend Yield
6 Feb ’23
6 Feb ’22
Abrdn Property Income-20.1%-19.3% -1.3%-13.9%22.6%6.0%-21.4%
AEW UK Reit-13.9%-12.3%10.7%-10.8%36.1%7.8%-1.4%
Balanced Commercial Prop. Trust-15.1%-14.3%11.9%-11.9%23.4%5.9%-31.9%
CT Property Trust-21.8%-21.0%-11.2%-18.4%22.7%5.7%-26.1%
Schroder Reit-17.1%-16.1%-7.0%-11.8%35.4%6.1%-23.1%
UK Commercial Prop. Trust-21.5%-20.8%-1.8%-17.8%20.0%5.9%-24.8%

Real estate has been a popular choice for income-seeking investors in the post-global financial crisis era, but even with dividends included, the average NAV total return was -17.3% for the quarter; extrapolated to an annual return this would represent a drop of nearly 70%.

Share price total returns were better – with two trusts posting double-digit positive numbers, dragging the average return to +0.2% – although this should be viewed in the context of September’s disastrous mini-Budget, meaning most trusts began the three-month period with share prices at or close to post-Covid lows.

Softer revaluations

With the trusts now trading at an average discount to NAV in excess of 20% – considerably wider than the five-year average, according to Winterflood Securities – investors may question if this presents an attractive entry point. Analysts at JP Morgan Cazenove currently have a ‘neutral’ rating for most of the sector, with UK Commercial Property Trust rated ‘overweight’.

But Peter Sleep (pictured), senior portfolio manager at Seven Investment Management (7IM) is unconvinced. “The average discount to NAV is probably a more accurate way of showing what is going on than the NAV itself,” he argues, pointing out that the property valuations are put together by surveyors who are incentivised not to be too aggressive with valuations on the downside.

In previous bouts of negativity and volatility, the closed-ended structure has proved its worth for commercial property investors. While investors in open-ended property funds have faced restrictions on withdrawals – given the fundamental liquidity mismatch between a daily-dealing Oeic and a physical property that could take months to sell – investors in closed-ended property trusts (where shares change hands in the stock market, independent of the underlying portfolio) always have the option of an exit, albeit perhaps at a significant discount to NAV.

Many of the trusts in the table moved from discounts of more than 40% in 2009 to premiums, as quantitative easing took interest rates to zero and below. However, today’s backdrop does not point to the likelihood of such a swift re-rating.

“After the financial crisis, money flooded out of cash accounts and money market funds as investors went searching for income elsewhere,” says Sleep. “Now we have the reverse, with money flooding back into cash and near-cash as interest rates rise.”

Cash holdings in 7IM’s portfolios are now attracting returns of 3.5-4%, and Sleep argues that the spread between a risk-free return of 4% and the average 6.2% yield on the hard-pressed property trusts is likely to be insufficient to attract investors, given the volatility of the underlying asset class.

Dead or distressed

Added to this, the manager points to challenging fundamentals in the key areas of commercial property in which many of these funds invest. “Rising interest rates are kryptonite for property investors,” he says. “With rates going from 0% to 4%, funding costs for these funds have probably gone from 2% to 6%. At the same time, you are seeing companies like Amazon releasing logistics space after they over-built, the residential market is dead, retail has restructured a bit in the post-Covid period but areas such as shopping centres remain distressed.”

The office market – long a mainstay of traditional Reits – also faces headwinds from the shift towards more flexible and remote working.

Sleep says multi-asset and real asset fund managers are increasingly eschewing the mainstream commercial property sector. He mentions the recently launched GBP share class of the Fidelity Alternative Listed Equity Feeder Fund, which has small allocations to residential property and student housing, but is otherwise focused in areas such as infrastructure, renewable energy, private equity and credit, and precious metals.

Meanwhile, the Aegon Diversified Monthly Income Fund has been reducing its holdings in real estate, a sector its managers say “continues to struggle as higher funding costs reduce future return potential for the more levered companies”. Exposure stood at just 4.3% at end-December 2022.

In the long term, property has proved itself to be a good hedge against inflation as well as a relatively dependable source of income. Those who currently hold closed-ended property funds for both these reasons, and have no pressing need to realise their investments, probably have no cause for alarm – a point reflected in JP Morgan Cazenove’s ‘neutral’ to ‘overweight’ ratings. But Sleep counsels that the sector “will require patience”, given that the bad news seen in December’s quarterly valuations may not be the end of the story.


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