The outlook for UK property is lacklustre in 2019, according to analysts at Numis, although there are a number of investment trusts that appear attractive at the start of the year. 
In its recommendation for alternative investment trusts, the broker noted that capital values are forecast to fall in every property sector in 2019 with the exception of industrial properties. While the industrial space could see a 1.6 per cent rise in capital values, shopping centres and West End offices are expected to fall by 4.5 per cent and 2.9 per cent respectively.
Over the coming five years, capital values are tipped to decline by 1.6 per cent overall before turning modestly positive by 2021. Annual rental value growth, on the other hand, is forecast to average 1 per cent from 2018 to 2022.
“Against the relatively weak market backdrop for commercial real estate we do not expect the focus to move away from specialist property funds, particularly those offering inflation-linked, long-term revenue streams,” Numis’ analysts added.
“Share price performance of the general commercial funds will continue to be impacted by sentiment towards capital values, although the high income component should maintain positive net asset value [NAV] total returns. In particular, we believe portfolios with an industrial or alternative bias should continue to outperform.”
Performance of trust vs sector since launch
Source: FE Analytics
That said, the firm highlighted five UK property investment trusts on its recommended list, with Regional REIT being included as a ‘trading’ buy for its attractive covered yield and discount. The £344.9m trust is managed by Toscafund Asset Management and aims for an attractive total return with a strong focus on income.
“It is difficult to see a major catalyst for discounts to narrow significantly in 2019, meaning investors will need to take a longer-term view on total returns. We have retained Regional REIT on our recommended list on valuation grounds,” the broker said.
The trust currently owns 151 properties with 950 tenants. More than 70 per cent of the portfolio is offices, but 21 per cent is invested in industrial properties and 7.4 per cent in retail; its most valuable properties include Glasgow’s Tay House, Basildon’s Juniper Park and Woking’s Genesis Business Park.
Data from the Association of Investment Companies shows that Regional REIT is trading on a discount to NAV of 7.1 per cent, which is higher than the IT Property Direct – UK sector’s average discount of 3.6 per cent. It has ongoing charges of 4.81 per cent (including the most recent performance fee) and is yielding 7.9 per cent.
Numis has one more ‘trading’ buy on its recommended list: Stenprop, which it has chosen for its attractive yield and re-rating potential.
The broker noted that the trust is an established international property business. It is transitioning from a multi-sector, multi-geography property company to a UK specialist in multi-let industrial estates, which involves the disposal of non-core assets, in line or better than their valuation.
Progress was made in this process in 2018 and has continued into the new year with the sale of Euston House at a premium, which boosted the trust’s NAV by 3.3 per cent. Following this sale, multi-let industrial investments represented 40 per cent of assets, putting the company on-track for its target to be invested 65 per cent in the high growth sector by March 2020.
“We believe that the company is well-resourced, both financially and from a management perspective, to continue to scale its UK operations and capture the strong market dynamics of a highly fragmented market,” Numis’ analysts said.
“We believe its serviced industrial approach is an interesting differentiator. In the meantime, we believe the valuation looks attractive relative to other London Stock Exchange-listed industrial peers, with the shares currently trading on an attractive discount [of around 23 per cent from its September NAV] and prospective yield of circa 6 per cent.”
Performance of trust vs sector since launch
Source: FE Analytics
Numis has the LXI REIT as a ‘core’ buy on its recommended list; the rationale for this inclusion is the trust’s diversified portfolio of long-lease assets.
The £424.5m trust aims for attractive inflation-protected income and capital returns through a diversified portfolio of very long-let and index-linked UK property assets.
Investor demand for income streams with low volatility and inflation linkage meant there was a spate of property funds targeting long-lease assets being launched in 2017, with LXI REIT being one of them.
The analysts at Numis noted that it had a good 2018, which was its first full calendar year of track record: “LXI delivered the strongest performance on a share price and NAV total basis [of all long-lease trusts].
“The premium expanded from an average of 2.3 per cent to 7.5 per cent by the end of the year. In our view, this reflects the impressive portfolio performance boosted by profitable disposals and accretive acquisitions.”
LXI REIT has ongoing charges of 1.21 per cent, is trading on an 8.4 per cent premium and yields 4.5 per cent.
The next UK property trust that Numis has on its recommended list as a ‘core’ buy is The PRS REIT, thanks to its presence in a structural growth market.
The £467.5m trust is a pure play on the private rented sector (PRS), providing newly-constructed homes for middle-income families that pay rent at market levels. Its current share price is lower than that of its IPO in March 2017 but the broker points out that this is partly because it is paying an uncovered dividend as its affordable rented home developments progress through the construction phase.
“Over the longer term, we believe that PRS operates in an attractive area of the property market with a business model that is well aligned to the UK government’s ambition to deliver more affordable family homes; the Homes & Communities Agency invested at initial public offering and in the subsequent placing,” the analysts added.
“Management appears to be able to source land at attractive prices, achieve planning permission and deliver affordable homes at a faster rate than other developers.”
The PRS REIT has ongoing charges of 1.13 per cent, is trading on a 5.1 per cent premium and yield 5.1 per cent.
Performance of trust since launch
Source: FE Analytics
The final trust on the list is Secure Income REIT. This is a ‘core’ buy because of the strong management that comes from Prestbury Investments’ Nick Leslau.
The £1.2bn trust is another that focuses on long-lease assets. Prior to 2017, it was the only vehicle in the market to concentrate on this space.
Secure Income REIT issued shares in 2018 in reflection of strong demand for predictable income streams. It used the £315m raised to fund the purchase of two substantial off-market portfolios in the hotel and leisure sectors.
The portfolio is now weighted across three sectors: healthcare at 43 per cent, leisure at 36 per cent and hotels at 21 per cent. The healthcare assets comprise 20 freehold private hospitals, 19 of which are located in England let to listed Australian healthcare company Ramsay Health Care.
Secure Income REIT has ongoing charges of 2.60 per cent, is trading on a 12.3 per cent discount and yields 5.5 per cent.