UK Commercial Property REIT (UKCM) achieved a 10.6% NAV total return over the year to the end of June 2018, but its share price has lagged its steadily rising NAV and its discount has widened to 5.2%, among the widest in its UK direct property peer group. In July 2018, UKCM became a UK REIT to mitigate the risk of significant potential tax charges falling due from 2020 and agreed a reduced management fee, effective January 2019. UKCM is significantly overweight in the industrial sector, which is expected to continue to lead market performance, while exposure to the weaker retail sector has been reduced. The manager sees considerable scope for near- and medium-term earnings improvement from the portfolio’s reversionary potential, which implies c 26% upside to rental income if market rates are achieved across all property assets.
UKCM aims to produce a sustainable income from a focused portfolio of prime UK commercial property assets. A largely unrestricted bottom-up investment approach is adopted, but sector and regional allocations broadly follow the investment manager’s market views. The manager prefers to hold resilient assets, such as multi-let industrial properties, which reduce exposure to individual tenants, thus reducing void risk. Drawing on the local market knowledge of Aberdeen Standard Investments’ extensive property 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 forecast to be below its future long-term trend in 2018 and 2019, with Brexit uncertainty affecting market sentiment. Within commercial property, the industrial sector is expected to continue to lead near-term market performance, although alternative sectors are likely to remain popular with investors, and asset selection within sectors is likely to become increasingly important. Relatively modest property market returns are anticipated over the medium term, with income the key driver and asset management initiatives providing upside potential.
After reaching a 5% premium to NAV in June 2017, UKCM’s share price moved back below NAV in October 2017. Despite a steadily rising NAV per share, the share price has remained relatively flat in 2018. As a result, the discount has widened, and the shares are currently trading at a 5.2% discount to EPRA NAV.