UK Commercial Property Trust (UKCM) is one of the largest UK real estate investment companies and aims to be among the lowest risk in the sector, reflected by its low level of gearing. The portfolio was repositioned in 2015 and UKCM has outperformed its benchmark since March 2016. In recent months, UKCM has moved underweight the weaker shopping centre subsector, as well as making its first hotel investment, which increased the proportion of RPI-linked and long-dated income to 15.2%. The manager sees significant reversionary potential for the portfolio, with its estimated rental value (ERV), based on market rents, indicating c20% upside to rental income, giving the prospect of near-term earnings growth and potentially providing scope for future dividend increases.
UKCM aims to generate a sustainable income from a prime UK commercial property asset portfolio. The portfolio is constructed using a bottom-up approach, but broad sector and regional allocations are aligned with the property team’s market views. The manager prefers to hold resilient assets, such as multi-let industrial properties, that reduce exposure to individual tenants, thus reducing void risk. Drawing on the local market knowledge of all managers in Aberdeen Standard Investments’ property investment team, the manager seeks to add value by identifying market developments before they are reflected in pricing, and actively managing the portfolio to improve the rental value of properties.
UK GDP growth is expected to slow modestly in 2018 and, with the uncertainty created by Brexit negotiations, the potential for the UK property market to see further capital gains over the next 12 months appears relatively limited. However, UK property assets currently offer a c 5% income return, which compares favourably with the c 1% yield on UK government bonds. Also, as a real asset with rental income subject to upward reviews, property can provide a measure of inflation protection, which may add to the appeal of the asset class to those income-seeking investors with particular concerns about capital preservation.
UKCM’s shares have largely traded between a 10% premium to NAV and a 10% discount over three years and broadly within a narrower 5% premium to 5% discount range over one year. The share price has recently widened to a 6.7% discount to EPRA NAV, which compares with its 1.2% one-year average discount.