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The top-rated trusts to help diversify your income stream, according to Investec

31 July 2016

With investors struggling to find a sufficient source of income, Investec Wealth & Investment suggests a number of property trusts that could provide decent yield opportunities today’s climate.

By Jonathan Jones,

Reporter, FE Trustnet

Trusts specialising in non-traditional property assets are where income-seeking investors should be looking in today’s market, according to Investec Wealth & Investment, which has upped its exposure over the last 18 months.

With cash yielding nothing, stock markets in a state of flux following the EU referendum result, bonds markets at their most expensive levels in history, and open-ended property funds suspended following a flood of outflows, investors have been left with limited options when it comes to finding income.

However, for those investors who are willing to look outside of the mainstream asset classes, Investec Wealth & Investment says there are genuine income opportunities in more niche areas of the property market – despite the fact conventional direct UK commercial property funds have been hit hard by the Brexit vote and the outlook for the sector remains unclear.

Performance of sector in 2016
 
 Source: FE Analytics

The group now has around 20 per cent of its real estate exposure, or £200m, in non-traditional property vehicles owning the freeholds to a range of unorthodox investments including GP surgeries, student accommodation, care homes and theme parks.

These sub-sectors have become increasingly attractive for income-seeking retail investors, the group said in a statement, because they are exposed to less economically sensitive areas of real estate and invest in stable assets with good cash flow profiles and the prospect of capital growth as rents increase over time.

Chris Hills, chief investment officer at Investec Wealth & Investment, said: “Many investors are looking for a healthy level of income without taking on too much economic risk in terms of voids or tenant defaults and these non-standard property plays are ideally suited to this objective.”

“These sub-sectors benefit from long and stable leases, strong cash flow provision and favourable demographics that are likely to result in increased levels of demand over the long term.”

Therefore, in this article, Investec Wealth & Investment (IW&I) highlights its four preferred non-traditional asset classes, as well the trusts it is holding to access them.

 


GP surgeries

For those looking for dividends of around 5 per cent, with the additional support of government-backed cash flow, IW&I suggests looking at trusts that own doctor’s surgeries.

It has invested for many years in Primary Health Properties and Medicx - vehicles that invest in UK primary health property leased principally to GPs, NHS organisations and other healthcare users - and is now one of the largest external shareholders in these REITs. 

Of the two, Primary Health Properties has the longer track record, having been launched in 1998, and also has the best performance over five years, returning 86 per cent to investors.

However, Medicx has not been sluggish, returning 63 per cent to investors. This compares favourably to the sector average of just 14.5 per cent, as the below graph shows.

Performance vs sector over 5yrs

 

Source: FE Analytics

The £492m Primary Health real estate investment trust (REIT) currently offers a yield of around 5.8 per cent, and its share price has risen 1.6 per cent since the start of the year.

 

Student accommodation

Second on the list is student accommodation, where IW&I says the sector is well positioned for future growth, despite rising tuition fees.

The group says it looks attractive, “given the supply/demand imbalance driven by increasing numbers of students, particularly those from overseas who are often prepared to pay higher rent”.

Investec Wealth & Investment has invested in two quoted student accommodation funds, Empiric Student Property and Gravis Capital Partners.

Of the two, Empiric has performed better over one year, returning 8.8 per cent compares to GCP’s 7.8 per cent, but both are lower than the IT Property sector.

However, GCP has a longer track record, having been set-up in 2013, and since launch has outperformed the sector by 15 percentage points, as the below graph shows. The trust, which has risen 6.2 per cent so far this year, offers a four per cent yield.

Performance vs sector since launch

 

Source: FE Analytics

The trust is trading at a 3.66 per cent premium to its NAV, though this is below its one-year average of 3.9 per cent, and less than Empiric’s 5.22 per cent premium.

GCP has an annual fee of 2.96 per cent, which is also one percentage point lower than Empiric’s 3.89 per cent, though the latter offers a higher yield of 5.37 per cent.


 

Premium care homes

Investec Wealth & Investment also sees value in the premium care home sector, which it says offers considerable potential.

Its preferred investment is Target Healthcare, which owns a portfolio of high quality purpose-built UK care homes. 

The trust, which owns over 30 freehold assets with long leases, offers a dividend yield of 5.5 per cent, and has risen 4.8 per cent so far in 2016.

Dividend chart since launch

 

Source: FE Analytics *Figures based on a £10,000 investment at launch

As the above graph shows, the trust has grown its dividend every year since its launch in March 2013, and is on course to do so again in 2016.

Target is trading at a 10.5 per cent premium to its NAV, though this is slightly lower than its one-ear average of 10.76 per cent, and has an ongoing charge of 1.63 per cent plus performance fees.

 

Hospitals and theme parks

Finally, IW&I has also invested in Secure Income REIT, a trust that owns a freehold portfolio of 26 health and leisure real estate assets.

Its portfolio includes 19 private hospitals and six leisure assets including owning land for visitor attractions Thorpe Park and Warwick Castle. 

It has yet to produce a dividend, but in its 2015 annual report announced it would be commencing a dividend programme, with an initial net yield of 5.3 per cent due to start in August 2016.

The trust, which has seen its share price rise 6 per cent so far this year, has returned 18.5 per cent since its launch in 2014, and IW&I suggests it is another option for investors looking for income-earning investments.

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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.