The launch of Special Opportunities real estate investment trust (Reit) that we wrote about two weeks ago has flopped, with the company failing to raise the £250m it wanted to buy commercial property portfolios being sold cheaply by pension schemes.
Investors baulked at putting money into a new fund when interest rates are still high and six existing Reits investing across the UK real estate market can be bought at bargain prices.
With that avenue closed, the question is, with shares in generalist listed property funds trading 27pc below asset value, which should you choose?
The abnormally wide discounts present a good opportunity with real estate recovering after a two-year slump.
In most areas, commercial property prices are stabilising and rents growing – particularly in industrial parks and warehouses where there is limited new supply – although the office sector remains challenged by working from home and the cost of environmental standards.
Consensus forecasts compiled by the Investment Property Forum predict total annual returns of 7.5pc from UK real estate in the next five years. These range from more than 8pc for industrial properties and retail warehouses, 7.2pc for shopping centres and 5.8pc for offices, though London’s West End and City are expected to do slightly better.
There’s also the potential for more bids to liven up depressed Reit stocks following UK Commercial Property’s acquisition by Tritax Big Box last month and LondonMetric’s purchase of CT Property last year.
Analysts recently provided some guidance to the Association of Investment Companies on which UK generalist Reits investors should buy. Yields of 5-9pc look attractive but Andrew Rees of Deutsche Numis said: “You need to check how they [dividends] are being paid – from earnings or capital – and if they are fully covered.”
Emma Bird at Winterflood Securities added: “It is important to note that earnings growth is a function of rental growth but also costs, so if they have rising costs (such as vacancies, debt, capital expenditure) this can impact earnings negatively even if rental income is growing.”
Surveying the latest financial results from Reits, three generalists stand out.
