Property trusts' supportive world has vanished and we must adapt to a new one

  • In Business
  • 2022-12-01 06:00:00Z
  • By The Telegraph

Over the years this column has tipped a fair number of property investment trusts or Reits. Until recently the world was very kind to these funds: they could borrow for next to nothing and invest that money, along with that of shareholders, in properties which yielded a good rental income and turned a nice profit for investors, delivered in the form of a tidy yield plus, as often as not, some capital growth.

That world has now vanished, so we need to reassess the case for these portfolios.

However, other forces are at play too. Some property funds have the scope to raise their income from rents, either from the free-market workings of supply and demand or from the stipulations of rental contracts, while rising interest rates in the wider world do not automatically hit trusts if they have taken out fixed-rate loans or otherwise limited their exposure.

To navigate this maze of interlocking influences to arrive at the most likely prognosis for property investment trusts, we sought expertise from two well-informed sources: the Reits team at Invesco, the fund manager, and the property analysts at Peel Hunt, the broker. Questor was struck by the positive tone of both.

Each contrasted the position now with the crisis that engulfed property funds during the financial crisis and said trusts had learnt from the mistakes they had made then - principally over-borrowing.

"They learnt a hard lesson in the global financial crisis, when they had too much debt, and have been very sensible over the past cycle," the Invesco team says. "So they start in a really healthy place - they have typically borrowed 20pc of the value of their portfolio, not 40pc as before.

"This is true across the board of property trusts. Their interest bills are well covered by rental income and none of them is having difficulties with their loan covenants."

Matthew Saperia, of Peel Hunt, agrees. He says he expects the vast majority of Reits to avoid the need to raise more money from shareholders to reduce debt. "On the whole we'll escape recapitalisation - there are enough levers for trusts to pull internally, even in the worst cases. Their ability to service debt is pretty robust at the moment."

This is not to say that everything is rosy. Even if a trust can pay its interest bill and even if it can maintain its dividend, property values are under severe pressure. Commercial property prices have fallen severely over the past four months, according to the Investment Property Databank, even if the evidence is not yet there in the net asset values (NAVs) reported by trusts.

"Valuers have moved but there is a long way to go," Invesco says. Share prices, which do not need to wait for a formal property valuation process to take place, are another matter and big falls here have led to wide discounts. "Property companies are waiting for the reset to happen. Share prices lead the way - it was ever thus," the fund manager says.

So, if we are lucky, the consequence when valuers do mark down the NAVs of these trusts will be that the discount narrows as the share price and the NAV start to come into line, rather than that share prices fall further.

The other cause for optimism is over rents. Saperia says: "Operationally, almost without exception, trusts are benefiting from demand and rents that are still moving in the right direction. I don't see an impact on good-quality property, which is what you generally find now in the quoted sector."

Invesco points out that some trusts that have reported results recently have increased their dividends. "These are not worried companies," it says. Supply-demand dynamics in some sectors, such as student housing, logistics and doctors' surgeries, are particularly favourable.

We can expect more volatility as property values and NAVs are updated in the coming months, especially if those "risk-free" bond yields start to change sharply again. But, thanks to those solid-looking rents and conservative debt structures, Questor will hold on to all its Reits.

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