Property investment trusts targeting long-lease assets, residential housing and European real estate are among those being tipped by analysts at Numis Securities. 
The Brexit result might have cast a cloud over UK property funds but the asset class remains an important diversifier for investor portfolios. Added to this is the fact that the closed-ended structure is seen as the preferred way to access the illiquid asset class.
In their recommendations for the coming year, Numis Securities analysts said: “In 2018, we do not expect the focus to move away from specialist property funds, particularly those offering inflation-linked, long-term revenue streams.
“Whilst share price performance of the general commercial funds will be impacted by sentiment towards capital values, we believe that those funds with modest gearing, defensive property strategies and well-covered high or rising dividend yields are likely to see strongest support.”
In the article below, FE Trustnet takes a closer look at the four property investment trusts that Numis has on its recommendations list.
Picton Property Income
First up is the £464.4m Picton Property Income investment trust, which Numis said is a “trading opportunity” given its relative value versus peers. Data from the Association of Investment Companies shows the trust is currently trading on a 2 per cent discount to net asset value (NAV), compared with a IT Property Direct – UK average discount of 0.4 per cent.
Performance of trust vs sector over 5yrs
Source: FE Analytics
“Picton has outperformed its closest peer group on a NAV total return basis in each of the last three calendar years, yet its discount has been persistent,” the broker’s analysts explained. “While this may partly reflect the lower respective dividend yield of 4 per cent and 3.9 per cent respectively, relative to the peer group average of 4.9 per cent, it is well covered by recurring income.”
Over the past five years, the trust has been the best performing member of the IT Property Direct – UK sector with a 181.22 per cent total return, while it has paid out £4,142 in dividends on an initial investment of £10,000 made at the start of this period.
The portfolio currently owns 31 properties spread across the UK, including Parkbury Industrial Estate in Hertfordshire, Tower Wharf in Bristol and Parc Tawe North in Swansea.
Picton Property Income has ongoing charges of 2.47 per cent, is yielding 4 per cent and is 36 per cent geared.
PRS REIT
Numis’ analysts have the £256.7m PRS REIT as a core holding, citing a “structural growth market” as being the rationale behind its recommendation. The trust invests in newly built private-rented family housing with its portfolio including developments in Liverpool, Greater Manchester and Sheffield.
“PRS REIT raised £250m in May to invest in newly constructed private rented properties comprising mainly family homes. These are to be let on 12-month Assured Shorthold Tenancies (AST) to qualifying tenants,” the broker explained.
“The properties will be focused on the largest English towns/cities outside London. Assets will come with a 10-year National House Building Council or equivalent warranties, resulting in a ‘low level of capital expenditure allied to a predictable and low-cost maintenance regime’.”
Performance of trust vs sector since launch
Source: FE Analytics
Since launch in May 2017, the trust has underperformed its average IT Property Direct – UK peers with a 1.54 per cent loss, although this is a very short timeframe. The trust is still building up its portfolio, with more homes either already completed or underway but a further 2,000-plus in the pipeline.
PRS REIT does not yet have a published ongoing charges figure. It is trading on a 4.5 per cent premium to NAV, is not geared and is yielding 4.5 per cent.
LXI REIT
Another core recommendation is the LXI REIT, which Numis likes because of its “diversified portfolio of long-lease assets”. Last year saw a number of property funds targeting long-lease assets, reflecting the increasing investor demand for predictable income streams, with LXI REIT being the first to IPO.
The trust aims to deliver inflation-protected income and capital growth over the medium term through a portfolio of long-term index-linked leases with institutional-grade tenants. It will only invest in assets with leases containing regular, upward-only rental reviews and will not undertake any direct development activity or take any direct development risk.
Performance of trust vs sector since launch
Source: FE Analytics
“The portfolio has performed well since IPO, with an 8.5 per cent uplift on acquisition price – excluding purchasers’ costs – resulting in NAV growth of 7.2 per cent in the seven months to 30 September,” Numis added.
“The manager comments that asset value growth to date reflects: discounts achieved on forward funding pre-let developments in small lot sizes; early mover advantage in growth sectors; yield compression in wider long-lease sector; and off-market nature of vast majority of the company’s acquisitions.”
LXI REIT is yet to publish its ongoing charges, given its short history. The trust is trading on a 0.1 per cent discount to NAV, is not geared and yields 2.5 per cent.
Schroder European Real Estate
The final core property recommendation from Numis is the Schroder European Real Estate investment trust, which the group likes because of its attractive discount of 6.5 per cent and its exposure to growth in Europe.
“We believe an attractive option for investors looking to diversify their UK property exposure is Schroder European Real Estate, which has invested in a portfolio of European (ex UK) real estate assets,” the broker’s analysts said.
“The manager focuses on high quality assets in ‘winning cities’, characterised by large, liquid real estate markets offering superior growth potential. Examples include Amsterdam, Berlin, Hamburg, Madrid, Munich, Paris, Stockholm and Stuttgart which will benefit from infrastructure improvement, economic recovery and structural trends such as urbanisation.”
Performance of trust vs sector since launch
Source: FE Analytics
The trust currently has 56 per cent of its portfolio invested in French properties, with another 30 per cent in Germany and 14 per cent in Spain.
It tends to have around 70 per cent of its investments in ‘core’ properties that create stabile income streams with the remaining 30 per cent in ‘value-add opportunities’ that generate capital returns through projects such as refurbishments and changes of use.
Schroder European Real Estate has ongoing charges of 1.87 per cent and yields 4.2 per cent.