Apr

Commercial property investment trusts outperform, as optimism returns

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The AEW UK REIT fund, (AEWU) currently priced at 132p per share and capitalised at £206mn, has had a stellar run since the depths of the Covid pandemic.

The rock-solid performance the trust has achieved has topped the UK diversified commercial property investment trust market over the past one, three and five years, with stock analysts now pushing through more upgrades.

The Investors’ Chronicle writer Simon Thompson reports a net asset value (NAV) total return of 7.37 per cent for the three-month period to 31 March 2022. He says the 4.74 per cent like-for-like valuation increase is driven by investments in the office and industrial sectors, with a very healthy and robust outlook with its total portfolio’s estimated rental value (ERV) forecast to be 20 per cent higher than its current gross income.

The company’s 7.37 per cent quarterly NAV return is driven by a £10.7mn valuation uplift across its £240mn investment portfolio. Half of this comes from its industrial property (representing 50 per cent of the portfolio weighting), and around one-quarter comes from offices (18 per cent weighting).

Steady improvement post the pandemic

New research from Cluttons Investment Management shows that total commercial property returns have remained in line with the MSCI Monthly Index of almost 20% in 2021, up from 13.4% in 2020 and above the industry predictions which varied between 10-14%.

Investment volumes in 2021 rose 9% and reached 10% above the long-term average. Q4 returns alone rose from 4.6% to 7.9%. This represents the strongest quarterly performance since Q4 2009 when the industry started to bounce back following the Great Financial Crisis (GFC).

Cluttons says that Q4 commercial property performance was boosted by London’s West End and Midtown offices, as well as industrials and retail warehouses, in a sign that the Omicron virus and Plan B restrictions, including the latest ‘working from home guidance’, have had little impact on confidence in central offices as an asset class.

Jamie McCombe, head of Cluttons IM, has said:

“Despite the ongoing pandemic, inflationary pressures and Brexit, 2021 saw a solid performance in commercial real estate with investment volumes up, returns well up on expectations and yields hardening.

“Property funds are open again, assets under management have risen and while lending remains muted, transactions are increasing. On the rental side, June 2021 saw the bottom of the cycle for all property rental values and we expect recovery to pre-pandemic levels by Q2 2022 while capital values have already recovered and will continue to rise in the foreseeable future.

“We think this year will see further inflationary pressures with perhaps four rises in the Bank Rate of 0.25%, ending the year on 1.25%. For property returns themselves, we expect another strong year with over 10% returns for all property.”

Industrial warehousing leads the charge

The familiar themes of expansion in industrial warehousing markets and demand within the retail warehousing sector have delivered 4.65 per cent and 3.95 per cent quarterly valuation uplifts, respectively. AEW’s NAV per share is now more than 20 per cent higher than it was 12 months ago and the board has agreed an 8p per share dividend payout at the interim.

AEW recently agreed the sale of Eastpoint Business Park at 90 per cent premium to carrying value, while rental growth remains a key driver for its positive re-valuations. One example is AEW’s industrial site in Basildon, The Apollo Business Park, which has been revalued upwards by 22.5 per cent. This was during the last quarter following the signing of a new five-year lease at a rent 15 per cent ahead of the valuer’s previously estimated levels.

In Bradford, the open market rent review of an industrial asset occupied by Pilkington UK led to a 14 per cent increase in income (over a three-year period) and an 11.7 per cent uplift in capital value, while in Rotherham, terms were finalised with a new tenant to take the 80,000 square foot (sq ft) space vacated by Hydro Components last December. Once the 10-year lease has been completed later this year, rental income is set to significantly exceed previous passing levels of £3.35 per sq ft, underpinning a 20 per cent valuation uplift on that one asset.

Office revival

There’s a similar story with the firm’s office portfolio. In Oxford, Eastpoint Business Park has successfully signing up tenants from the City’s burgeoning life sciences sector, the higher rent roll supporting a 20 per cent capital rise in the property’s value. In Glasgow, a former office building in Bath Street has been awarded planning consent for conversion to student accommodation, pushing up its valuation by 13 per cent.

Given that the investment trust’s overall estimated rental value is 20 per cent higher than the company’s passing rent roll, then further material rental uplifts should be expected as assets come up for rent review or are re-marketed after refurbishment.