UK Commercial Property (UKCM), the £1.1 billion real estate investment trust managed by Will Fulton at Aberdeen Standard Investments, is seeking shareholder approval to move into new specialist areas to keep pace with the rapidly changing property market.
Fulton, who has run the generalist property fund since its launch 13 years ago, wants to broaden its remit beyond the conventional industrial, retail and office sectors on which it and its rivals have traditionally focused.
In particular, the manager and the trust's board want the flexibility to include healthcare properties, student housing, hotels, car parks, pubs, petroleum, and automotive buildings, as well as the commercially-managed private rental residential sector.
Fulton said it was ‘important to move with the times’ and diversify the portfolio more.
‘Since the company’s inception in 2006, the real estate landscape has changed with many sectors, previously in their infancy, having matured and become mainstream, commonly referred to as "alternative" sectors,’ he said.
He attributed the growth in alternatives to a number of structural changes, including ‘demographic, urbanisation, technology trends, the stability of income returns, and diversification benefits they can provide’.
‘We believe that the ability to selectively add them to the company’s portfolio is an important additional weapon in our armoury to potentially enhance future returns,’ Fulton (pictured) said.
The company will shortly publish a circular detailing the proposal and inviting shareholders to an extraordinary general meeting to vote on whether it should be adopted.
In recent years, specialist property areas have spawned a large number of new real estate investment trusts in healthcare, student property and warehouses. These have mostly succeeded in providing attractive yields whilst seeing their shares trade at premiums to net asset value (NAV) in response to investor demand.
By contrast, UKCM shares stand nearly 7% below NAV compared to a sector average discount of 3.8%, with several trusts trading on double-digit discounts as Brexit and fears of an economic slowdown have hit investor sentiment.
The trust's NAV per share slipped 1.1% to 93.4p in the fourth quarter of last year, although including dividends the total return dipped 0.1%. The NAV total return for last year was 4.5%.
The trust pays quarterly dividends which were 82% covered by earnings in the last three months of the year. They yield 4.3%, slightly below the AIC UK Property Direct sector average of 5%.
Although the shares have been volatile in the past year, over five years they have delivered a total return of 35.6%, the third best of the six peers with a similar record, although some way behind the best performer, its stable mate, Standard Life Investments Property Income (SLI), which has generated 62.8%.
The fourth quarter saw the UKCM portfolio produce a wide range of returns. Industrial properties, in which 46.4% of its assets are invested, rose 3.1%. By contrast, retail properties, in which 26.7% of the fund is held, fell 5.1%, with retail warehouse in which it is 18% weighted doing the worst with a 6.2% decline. Offices, where the trust has 16% exposure, slipped 2%.
Fulton recently increased the allocation to industrials by buying five warehouses in the Midlands for £85.4 million on a net initial yield of 5.5%,
He also sold an office in Marlborough Street, London for £73.2 million and a shop let to H&M and Barclays in Exeter for £23.5 million. This left the trust with £43.5 million, or 3.6%, in cash and an undrawn credit facility of £50 million.
The trust is in negotiations with its lenders to extend the maturity and increase the amount of credit available. At the end of the year, UKCM had total debts of £250 million, giving it a loan-to-value of 14.6% and making it one of the lowest geared Reits in the sector.