Yield of 9 per cent too good to miss

The closed-ended structure of investment trusts is also particularly suitable for this type of illiquid asset, with the majority of the sector having bounced back strongly following the property bubble of 2008-09.

Investor demand for these property investment trusts is reflected in the narrowing discounts – the average discount has shrunk from 32 per cent at the end of September 2008 to 4.2 per cent for those funds falling into the AIC's Property Direct UK sector.

Picton Property Income, formerly the ING UK Real Estate Income Trust, arguably falls at the riskier end of the sector but, given its attractive dividend yield (almost 10 per cent) and the prospect of a share re-rating, the risk-return trade-off is enticing.

The fund was one of the poorer performers in 2011, with the shares falling by 30 per cent, underperforming the sector by 22 per cent. This fall was driven mainly by refinancing concerns and investors' risk-aversion towards regional assets in the absence of long leases. But, according to figures from stockbroker Oriel Securities, shares in the fund have recovered by 11.4 per cent since a completion of its management internalisation (all management functions were internalised on 1 January with the fund manager becoming chief executive).

With the shares still trading at a deep discount of 30 per cent and the fund offering one of the highest dividend yields around, there is a good chance of Picton Property Income surprising on the upside from a share re-rating if it manages to execute a successful refinancing.

The expectation is that the fund, similar to the Standard Life Investment Property Trust, which saw its shares increase 23 per cent (versus 10 per cent for the sector) following a refinancing in December last year, will benefit from the refinancing which is expected to take place by June this year. As all of Picton's debt matures over the next 12 months, management is already in discussion with existing and new lenders and is confident that the fund will satisfy its refinancing requirements and increase its lender base.

While investors might still be nervous about the sustainability of the dividend, it is worth noting that, with the exception of 2008, Picton has consistently paid covered dividends since listing in October 2005.

Other positives include notable cost savings thanks to the internalisation of management functions along with the successful acquisition of Rugby Estates and a proposed offer for Invista Foundation.

Investors have a bias for funds focused primarily on central London property such as the F&C Commercial Property Trust; however, Picton Property Income boasts a well diversified portfolio across the UK with a good mix of office, industrial and retail properties.

That said, nearly half of its office portfolio (34 per cent of the total portfolio) is located in central or greater London and these have seen the strongest capital and rental growth performance across UK offices since the 2009 trough.

The top priority now is for management to refinance its short-term loans and, while obtaining financing can be a time-consuming exercise, if this is done successfully by the second quarter of this year, the risk attributed to Picton Property Income should improve, resulting in a positive share re-rating. Buy.

Source: Thomson Reuters Datastream & Oriel Securities

Performance figures as at 13 February 2012

Top 10 holdings (as at 13 February 2012)

Geographic Breakdown