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OPINION

Sorting a Reit from the chaff

Sorting a Reit from the chaff
June 14, 2017
Sorting a Reit from the chaff

So it's shaping up to be a busy year for Reit IPOs. And I should add that the chart below leaves out the companies that have recently converted to Reit status, which affords companies an exemption from paying corporation tax as long as they pay out at least 90 per cent of property income as dividends. Since 2012, when listing requirements were relaxed and entry charges abolished, there has been a modest trend towards the asset class.

 

 

 

 

There are reasons other than their tax status for Reits' popularity. The hunt for yield is one, as traditionally safe assets continue to pay peanuts. Another is the demand for property in the sectors targeted. Housing associations and local authorities are strapped for cash and under pressure to build, and so are making use of Reits such as Civitas Social Housing (CSH) and Residential Secure Income to 'recycle' their housing stock.

Impact Healthcare Reit (IHR) is the newcomer in the growing healthcare property sector cited in this week's cover feature. Another from that sector, Secure Income Reit (SIR), is the top performer out of the Reits that have joined the London market in the past five years (see table). Its portfolio includes private hospitals, but also theme parks let to Merlin Entertainments (MERL). That a few of these companies shoehorn 'secure' into their name reveals one aspect of their pitch - they are looking for stable tenants, in areas where there is need for supply, such as primary care.

 

 

 Price change since listing (%)Admission dateDividend yield (%)
Secure Income Reit62.1%5/06/143.6%
Tritax Big Box Reit45.8%9/12/134.2%
GCP Student Living43.4%20/05/133.8%
Ground Rents Income Fund29.2%13/08/123.0%
Pacific Industrial & Logistics Reit16.7%13/04/16na
Source: Capital IQ

 

 

The advantage that Reits have over open-ended investment companies is that they don't have to hold cash to satisfy redemptions, which is important if times get tough, as they did for commercial property last year, when a number of open-ended funds were shuttered. Instead, investors will dump the shares, meaning that the discount (or premium) to net asset value reflects investor sentiment towards the asset class. So the underlying liquidity is reflected in the pricing.

There are other risks, too. Investment management is commonly provided by a third party, so investors need to test their track record (see the instances of bad accounting among US Reits). How much skin does the manager have in the game in terms of an equity stake, and how is their fee structured? Another risk is dilution - further money raised to expand the portfolio may chip away at the shareholder return. There are also tax charges that can bite, for example if a Reit's interest cover ratio (property profits over finance costs) falls below 1.25:1. There is plenty to look at behind that promising yield.