Smith & Williamson has added a student accommodation Reit to its managed portfolio service to take advantage of depressed commercial property valuations as the UK emerges from the pandemic.
S&W MPS co-portfolio manager James Burns (pictured) said the indiscriminate sell-off in the UK commercial property sector last year as the country entered lockdown has created opportunities, particularly among closed-ended vehicles.
He said much of the sector is still being shunned with some Reits trading on “hefty discounts” to net asset value as the commercial property sector continues to look uncertain.
But with the economy starting to unlock, the team has added the Empiric Student Property Reit to its defensive and defensive income models to take advantage of the low valuations.
“We’ve been underweight property for much of the crisis, but we are now back at a neutral weight in some portfolios after adding Empiric,” Burns said.
“It is a UK Reit investing in premium student accommodation in prime locations in the UK, and the student accommodation story is backed up by long-term structural dynamics.
“If the easing of lockdown restrictions continues, as we believe it will, then this investment will benefit from students returning to university in September of this year. We would then expect the discount to narrow significantly.”
It is the first change to the MPS range since the introduction of gold to the portfolios at the end of last year, as Burns recently told Portfolio Adviser that the team left the portfolios untouched throughout Q1.
He added by using a closed-ended fund, the MPS can access the sector without worrying about the gating issue some open-ended property funds have been facing.
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The Empiric Student Property Reit’s share price halved during the pandemic, but Burns noted the management effectively reduced costs to help offset lower occupancy rates over the past 12 months.
It was also forced to suspend its dividend to preserve cash, but Burns said there is potential for this to be reinstated.
“We believe dividend payments of around 5% could be reinstated later this year. Empiric has a very successful track record in managing their properties in this niche and growing area, and we are excited to be invested in this fund at this stage of its recovery.”
The MPS also has a long-standing position in “more mainstream play” Picton Property Income, taking the range’s total property exposure to about 5% in the defensive and defensive income models.
“Another Reit, Picton gives the portfolios broad exposure to the UK property market as it recovers, and it has the advantage of being nimble within the property space due to its size, so we are very comfortable with that position,” Burns said.
