Property trusts and funds remain under the cosh

Which factors are negatively impacting the performance of property-focused investment trusts and funds?

Property trusts took a big hit from Covid-19 during the second quarter as non-paying commercial tenants caused dividend cuts and falling net asset values (NAVs). 

Investment trust analyst Winterflood said in a note that rent collection has affected the dividend policies of most UK commercial property companies. The Standard Life Investments Property Income Trust (LSE:SLI), for example, cut its dividend payment by 40%, in line with the percentage of rent it had managed to collect for the third quarter. However, the BMO Commercial Property Trust (LSE:BCPT) and the Schroder Real Estate Investment Trust (LSE:SREI) both reinstated their dividends, at around half their previous level. AEW UK REIT (LSE:AEWU) is the only generalist UK commercial property investment company to have maintained its dividend policy throughout the pandemic, says Winterflood. 

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In their quarterly NAV updates published to the end of June (which have all only recently been made available), most property trusts reported falling values. On a NAV total return basis, AEW UK REIT (LSE:AEWU) (up 0.3%) was the only one to see a positive return over the period. The next strongest were Picton Property Income (LSE:PCTN) (-0.6%), UK Commercial Property REIT (LSE:UKCM) (-2.3%) and BMO Real Estate Investments (LSE:BREI) (-2.5%). The laggards were Drum Income Plus REIT (LSE:DRIP) (-13.1%), Ediston Property (LSE:EPIC) (-5%) and Custodian REIT (LSE:CREI) (-4.9%).

Lockdown hits leisure businesses

The effect of coronavirus measures including lockdowns on retailers, hotels and restaurants has been dramatic. With many simply not making any money at all for months, it is no surprise they are defaulting on rent payments, explains Richard Williams, property analyst at QuotedData. 

Commercial landlords are negotiating with their tenants over rent deferrals, but right now they are losing money and there will be write-offs. “Some of these landlords are not collecting the amount of rents they are billing, which affects their earnings and means they can’t pay out the dividends they normally would,” he says.  

Open-ended property funds still shuttered

Meanwhile, in the open-ended fund space, almost every property fund in the sector is still suspended, including the largest such as the £2.9 billion L&G UK Property fund, the £1.8 billion Janus Henderson UK Pty PAIF, and the £2.2 billion M&G Property Portfolio. Some funds pulled down their shutters in 2016 during volatility and heavy redemptions caused by Brexit.

Further turbulence during the pandemic caused more problems for the funds, with property assets proving impossible to accurately value, so the funds began to close their door again. In June, BMO Property Growth & Income fund became the first to resume trading, as it has a smaller proportion of direct property assets than its competitors, but there is no sign of life from any of the others.  

Critics say this is clear evidence that property is just too illiquid to be held in retail open-ended funds and is only suitable to be held within the investment trust structure. The Financial Conduct Authority (FCA) is now consulting with the fund management industry to decide whether to end daily dealing in property funds and impose a 180-day notice period on withdrawals to address liquidity problems. 

“How are investors going to know six months in advance that they want to sell something?” asks Williams. “Open-ended property funds just shouldn’t exist, the only solution I can see is converting them into investment trusts.”

He points out that, when these funds do eventually reopen, they will face a wave of selling as investors rush to get their money out.

“At the moment, managers are probably trying to sell their assets to get more cash in ahead of that, but no one will be buying retail and leisure assets at the moment. The only things that will sell are their crown jewels, their top assets, and because they are forced sellers, they won’t get a fair price for them. That’s another thing that is crazy about these open-ended property funds: they become forced sellers in times of redemptions.”

A short-term setback?

Despite all the gloom, Williams suggests that over the long run this situation will prove a temporary setback for the property sector. Rents that have been deferred should eventually start to come through when the economy recovers from the effects of coronavirus. Meanwhile, players in the property space learnt their lessons from the 2008 financial crisis and are not over-leveraged as they once were. 

“Leverage is at a good level, they’ve got headroom on their debt covenants, they’ve learnt from last time and haven’t over-leveraged, so they can still service their debt without getting into trouble. Once we see a positive outcome on Covid, such as a vaccine, the long-term impact on property will not be that great in the scheme of things.”