Ian Cowie: bargains for the brave and a fundraise to avoid

Forget Chinese property and its possible collapse, our columnist has found two star trusts closer to home that are showing the way to go.

With China’s biggest property company, Evergrande (SEHK:3333), teetering on the brink of collapse, investors in overseas real estate need to climb a wall of fear. Even so, shareholders in one European property fund have received total returns of 59% over the last year, including 4.9% dividend income, but it continues to trade 16% below its net asset value (NAV). Talk about bargains for the brave!

Schroder European Real Estate (LSE:SERE) is benefiting from betting against the crowd. While many folk say online shopping will digitally demolish bricks and mortar, while working from home (WFH) will call time on commuting, SERE continues to hold a profitable portfolio of Continental retail and office space.

This £226 million investment trust’s top 10 assets are based in Paris, Berlin, Hamburg and Seville. Offices account for 30% of the total value, followed by 21% retail, 20% industrial - plus a reassuring 22% cash buffer.

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SERE’s fund manager Jeff O’Dwyer says: “We invest in European growth cities and regions, specifically institutional quality, income-producing commercial real estate. Target markets are mature and liquid and have growth prospects exceeding those of their domestic economy.

“We target office, retail, logistics and/or light industrial, leisure and assets which offer the potential for multiple uses. The risk profile is balanced between stabilised, income-producing real estate representing circa 70% of the portfolio with the remaining 30% in value-adding opportunities - for example, refurbishments and changes of use where capital returns are a larger component of the total investment return.”

That might sound like corporate burble but this approach to asset allocation has worked very well, placing SERE at the top of the Association of Investment Companies (AIC) ‘Property: Europe’ sector over the last year. Total returns over the last five years were lower, at 13%, so there is a substantial element of recovery bounce in its eye-popping 59% return over the last year. Charges, including performance fees, are also on the high side at 2.9% per annum but, as is the case with commercial property, quality usually costs.

Phoenix Spree Deutschland (LSE:PSDL) did even better over the last five years, with a total return of 97%, according to independent statisticians Morningstar. Returns from this £620 million fund’s portfolio of German property, with a focus on residential flats in Berlin, have eased back recently but remain ‘scheiße heiß’ at 21% over the last year.

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PSDL’s yield is also lower than many property investors expect at 1.7%, but charges remain elevated at 2.4% per annum, including performance fees. More positively - and uniquely in its sector - this trust has managed to increase its dividend by an annual average of 10% over the last five years.

Sad to say, your humble correspondent did not pick either of the above for his exposure to this sector. Instead, I invested in Aberdeen Standard Life European Logistics Income (LSE:ASLI).

To be precise, I paid 100p at launch in December 2017. Then I topped up at 75p in March 2020, buying shares that reached 130p before the managers recently announced a rights issue, seeking another £75 million of investors’ capital.

This right-to-buy one new share at 109p for every four already held knocked ASLI’s market price back to 112p this week, reducing its one-year return to 9.7%, yielding 4.5% dividend income. As if to demonstrate the power of marketing, this £418 million investment trust’s shares trade at a 7% premium to their NAV. By contrast, PSDL is priced at a 2.5% discount.

Even before the Evergrande earthquake shook confidence in stock markets, causing valuations to subside around the world, ASLI’s fund managers - who cost just over 2% per annum - would have been lucky to get away with their Oliver-like request for more. This shareholder continues to believe their investment story about warehouses needed to deliver all the stuff we buy online, and I admire some of their income-generating initiatives, such as solar panels on the roof to create revenue out of thin air.

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Thanks for that, guys, but I don’t think I will be taking up the rights issue to add to my ASLI stake, which already accounts for nearly 2% of the value of my life savings. To be candid, I would like to see them concentrate on wealth creation rather than asset gathering in future. PSDL and SERE show the way to go.

Ian Cowie is a shareholder in Aberdeen Standard Life European Logistics Income (ASLI) as part of a globally diversified portfolio of investment trusts and other shares.