Premiums deflating on UK commercial property trusts

The average share price premium to net asset value (NAV) for UK commercial property trusts has halved to 5.1 per cent compared to an average of 10.3 per cent over the past 12 months, as capital growth has begun to slow.

This follows a period of sustained demand from UK investors seeking both income and growth from the booming commercial property sector.

However, according to investment trust broker Stifel this period of prosperity may well be coming to an end. 'The capital growth rates of the UK commercial property funds continue to moderate as yield compression slows,' says Stifel.

'As we approach 2016 the sector is increasingly looking to rental growth to be the key driver of returns. As a result we think fund premiums will continue deflating as investor growth expectations lessen, although the attractive dividend yields should continue to provide some premium support,' it adds.

SLOWING CAPITAL GROWTH

The broker highlights the F&C Commercial Property Trust and the UK Commercial Property Trust, which both saw their capital growth slow significantly over the third quarter of the year (July to September).

Over the three months to the end of September, the F&C Commercial Property Trust delivered an NAV total return of 3.3 per cent. However the ungeared capital (i.e. the trust's property assets) increased by just 1.9 per cent, marginally behind the 2 per cent capital return of the IPD UK Quarterly index over the same period.

Stifel says this was the lowest quarterly capital growth for the trust since the third quarter of 2013. Subsequently, its share price premium has fallen to 7.3 per cent, down from an average of more than 12 per cent over the past 12 months.

Similarly, UK Commercial Property Trust saw its NAV growth slow to 0.8 per cent between July and September, the slowest quarterly capital growth for over two years. The property portfolio saw an unrealised capital increase of 1.3 per cent over the period, which was significantly behind the IPD index.

The strongest performing sectors of the portfolio were the fund's South East industrial assets, which saw an increase of 3 per cent, and its London West End office holdings, which saw valuations rise 2 per cent. The trust is now trading on a marginal discount of 0.3 per cent compared to an average premium of 5.1 per cent over the past year.

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