Commercial property investment trust discounts slump as investors head for the exit

The asset class - made up primarily of shops, industrial buildings such as warehouses, and offices - is a bellwether for the economy.

Investment trust discounts have slumped across the board over the past month’s coronavirus sell-off, and commercial property trusts have been among the hardest hit.

A month ago (20 February), the average commercial property trust discount stood at 3.2%, according to Winterflood, an investment trust broker.

Fast-forward one month, a period during which global markets have endured sharp declines, discounts for the sector have widened significantly to 30.5%.

The widening discounts are a reflection of notable share price falls for commercial property trusts over the past month, with the average trust’s share price fall over the past month standing at -28%. Over this period, some trusts have seen their share prices fall more than 40%: Picton Property Income (-40%), Regional REIT (-41%), Ediston Property (-41%), BMO Real Estate Investments (-41%), and BMO Commercial Property (-44%).

Commercial property is a bellwether for the wider economy, so is an economically sensitive asset class. The commercial property market is made up primarily of shops, industrial buildings such as warehouses, and offices.

Therefore, given the enormous negative economic impact the coronavirus will have, investment trust investors have rushed to the exit, causing discounts to widen as share prices have fallen.

Open-ended commercial property funds are also being negatively impacted by investors cashing in their chips. A number of funds put suspensions in place yesterday (18 March), including Janus Henderson UK Property, Kames Property Income, Aberdeen Standard UK Property, Standard Life Investments UK Real Estate, Aviva UK Property Income, and Columbia Threadneedle’s UK Property Authorised Investment fund. As a result, investors’ cash has been locked in the funds, so they cannot sell their holdings until the funds re-open. 

- Expect all open-ended property funds to suspend: raft of funds close their doors
Coronavirus anxiety is contagious

The suspensions add fuel to the fire of critics of open-ended commercial property funds, who argue the mismatch between daily liquidity and the ability of funds to sell their assets to redeem investors makes the structure inappropriate for retail investors.

But against this, the trade-off is that while investment trusts will never put suspensions in place owing to the differences in their structure compared with open-ended funds, investment trust investors can be left nursing notable short-term losses during extreme periods, such as this one.

Ben Yearsley, a director of Shore Financial Planning, notes that the suspensions this week of open-ended property funds has been driven by an inability of the independent valuers to accurately value the underlying properties.

He adds: “This could be down to a lack of transactions in the market (ie, no buying and selling currently) or could be more serious in that they are unsure of the impact of coronavirus on the short, medium and long-term value of parts of the commercial property market.”

Yearsley points out that this is “not an indictment of the open-ended fund sector”. He adds: “Just look at the discounts that quoted REITs are trading at, compared to their last net asset values. Many of these quoted trusts are trading at 40% discounts to the last net asset value.

“Yes, you can access your investment, but at a cost. The stock market is taking a very negative view of property currently – will working from home be the norm for many sectors in the future?

“If the crisis continues, trusts will have similar problems to open-ended funds if valuers cannot put a value on a building or warehouse.”

So, while the upshot with open-ended commercial property funds is that investors cannot access their money, panic-selling is a comparable problem for investment trusts. The managers are not forced to sell property to redeem investors, but the market can take a dim view of the outlook and force share prices down, as is happening at present.

Yearsley’s general view is those that can should “do nothing and ride this out”.

How discounts have widened

Property - UK commerical trust sector Current
discount* (%)
12-month
average discount (%)
Discount/premium
one month ago** (%)
AEW UK -43.1 -2.1 1.6
Alternative Income REIT -44.2 -18.1 -20.6
BMO Commercial Property -60.6 -15.4 -17.7
BMO Real Estate Investments -60.0 -18.5 -18.1
Custodian REIT -18.1 10.8 11.0
Drum Income Plus -9.0 -6.4 -9.0
Ediston Property -53.5 -16.1 -16.9
LXI REIT -14.9 12.9 19.7
Picton Property Income -46.4 -2.0 4.6
Regional REIT -43.4 -3.3 10.8
Schroder Real Estate IT -43.0 -16.8 -8.9
Standard Life Investments Property Income -33.9 -0.7 5.1
UK Commercial Property -45.4 -6.0 -3.6

Source: Winterflood. *Data 19 March. **As at 20 February, before the sell-off started

 

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