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Get high income at a discount via Standard Life Investments Property Income

Standard Life Investments Property Income is trading at a rare discount to NAV
October 18, 2018

Commercial property can provide consistent income and long-term returns, while also offering some diversification from equity markets. And getting exposure to this asset through a closed-ended fund such as an investment trust can boost your returns further, according to broker Canaccord Genuity.  

IC TIP: Buy at 88.4pp
Tip style
Income
Risk rating
High
Timescale
Long Term
Bull points

Discount to NAV

High yield

Strong long-term performance

Experienced manager

Bear points

Economic uncertainty

Dividend not fully covered

It found that the average direct property exposure level of investment trusts is 131 per cent of net asset value (NAV), compared with 78 per cent for the largest open-ended funds. UK commercial property investment trusts also have higher dividend yields with an average of 5.3 per cent, compared with 3 per cent for the largest open-ended funds. And over 10 years trusts have achieved an average annualised NAV total return of 7 per cent and shareholder total returns of 10.9 per cent. In comparison, UK commercial property open-ended funds made an average total return of 4.3 per cent.

Alan Brierley, analyst at Canaccord Genuity, says: “Structural advantages of investment companies include the ability to focus on actively managing underlying portfolios without the distractions of inflows and redemptions, which are often sentiment-driven and at the wrong time in the cycle. And the ability to use gearing to enhance returns and yields represents a significant competitive advantage.”

A closed-ended UK commercial property fund that provides higher than average income is IC Top 100 Fund Standard Life Investments Property Income Trust (SLI), which has a yield of 5.4 per cent. And over five years its share price has risen 73 per cent, beating the Association of Investment Companies (AIC) Property Direct – UK sector average return of 65 per cent.

Because of its good performance, Standard Life Investments Property Income has mostly traded at a premium to NAV over the past few years, and as recently as September was on a premium of around 8 per cent. But since then its rating has fallen quite sharply, and as of 15 October the trust was trading on a discount to NAV of 2.1 per cent, according to Winterflood Securities. Reasons for this include uncertainty about the impact of UK’s withdrawal from the European Union on commercial property and concerns on whether the property cycle is in its latter stages.

Despite this, Canaccord Genuity has recently upgraded its recommendation on the trust to 'buy'. “[Compared with other UK commercial property trusts this one] gives the highest effective exposure to the industrial sector, which has the highest consensus forecast return over the medium term,” says Mr Brierley. “It’s a high-quality vehicle and the derating is a good opportunity to buy a very good manager on a discount. The yield is also attractive on a relative and absolute basis.”

But Standard Life Investments Property Income's dividend is not fully covered by the income from its investments and if the wider economic backdrop deteriorates, the trust’s holdings may be negatively impacted. Analysts also do not predict much capital growth from the commercial property sector. The IPF UK Consensus forecast for between 2019 and 2022 is an annualised total return of 4.6 per cent, with income the key driver of these returns.

However, Standard Life Investments Property Income's manager, Jason Baggaley, has been running it since 2006 and has experience of investing through the property cycle. He is also focused on improving dividend cover. “Mr Baggaley actively manages the portfolio and has demonstrated his ability to add value through asset management initiatives," comment analysts at Winterflood. "This ability is particularly important in the current environment.”

Mr Baggaley has also reduced the trust's exposure to central London offices, which could take a severe hit from a disorderly Brexit, so that the trust now has just 6 per cent of its assets in this area.

So Standard Life Investments Property Income’s rare discount means you could buy into strong performance and an experienced manager, and diversify your income stream at what looks like a bargain. Buy. EA

 

Standard Life Investments Property Income Trust (SLI)

PRICE88.4pGEARING39%
AIC SECTOR Property Direct - UKNAV90.3p
FUND TYPEInvestment trustDISCOUNT TO NAV2.1%
MARKET CAP£359mYIELD5.4%
No OF HOLDINGS56*ONGOING CHARGE1.7%**
SET UP DATE19/12/2003MORE DETAILSwww.standardlifeinvestments.com
MANAGER START DATE13/09/2006  

Source: Winterflood Securities as at 15/10/18, *Standard Life Aberdeen as at 30/06/18, **Standard Life Aberdeen as at 31/12/2017

 

Performance

Fund/benchmark1 year share price  return (%)3 year cumulative share price return (%)5 year cumulative share price return  (%)
Standard Life Investments Property Income 12073
AIC Property Direct - UK sector average11665

Source: Winterflood Securities as at 15/10/18

 

Top 10 holdings as at 30/06/18 (%)

HoldingLocation Value Band
Denby 242Denby£15 -20m
SymphonyRotherham£15 -20m
Chester HouseFarnborough£15 -20m
The PinnacleReading£10 -15m
Hollywood GreenLondon£10 -15m
New Palace PlaceLondon£10 -15m
TimbmetShellingford£10 -15m
Howard Town Retail ParkHigh Peak£10 -15m
Marsh WayRainham£10 -15m
AtosBirmingham£10 -15m

Source: Standard Life Aberdeen

 

Sector breakdown as at 30/06/18 (%)

Rest of the UK industrial37
South east offices19
South east industrial16
Retail warehouse8
High street retail6
Central London office6
Rest of the UK offices4
Other4

Source: Standard Life Aberdeen