Will this year's property stars shine as brightly in 2021?

Logistics and social housing real estate investment trusts (Reit) have generated the highest total returns within the UK-listed property sector since the start of the year, as investors have flocked to secure income streams. 

Almost half of the top 10 total return performers – calculated as share price gains plus dividends paid – operated in the logistic sector, according to an analysis of FactSet data, led by Aberdeen Standard European Logistics Income (ASLI). Meanwhile social housing landlords Triple Point (SOHO) and Civitas (CSH) took the second and fourth spots, respectively.

Small-cap estate agencies Winkwork (WINK) and Belvoir (BLV) also made it into the top 10, after a surge in housing market activity prompted a re-rating in the shares, which also enabled the groups to pay out generous half-year dividends. 

The post-pandemic acceleration in ecommerce and concerns over border congestion following the UK’s imminent exit from the EU has forced companies to double-down on efforts to strengthen their supply chain management. That has naturally driven up demand for warehouse space and boosted rental values attached to logistics assets. Neither of those motivations are likely to dissipate in the coming year. 

Indeed, unlike offices and retail assets, industrial property is expected to grow rents this year and outperform the broader real estate market over 2021 and 2022, according to forecasts from the International Property Forum. 

Yet as well as growing demand, rental growth has also been fostered by an acute shortage in supply, particularly in so-called ‘last mile’ delivery warehouses. “The areas where industrial rents are highest, areas in and around London and the bigger UK cities, the amount of available space is lower and the demand for residential is very, very high as well,” says Peel Hunt real estate equity analyst, James Carswell. That has contributed towards a lack of development activity in logistics assets close to urban areas, he adds. 

However, supply has also been constrained by the comparatively low level of rents charged by logistics landlords, such as Warehouse Reit (WHR), compared with other types of commercial property, which has meant it does not always make economic sense to build new assets. “The value of the properties in Warehouse Reit’s books are below what it would cost you to rebuild the units,” says Mr Carswell. That should ensure that it is able to keep growing rental income next year, he adds. 

Not all have eschewed large-scale development. Segro (SGRO), which, in a sign of the times, has cemented its position as the largest UK-listed property group, has been spending heavily on acquiring land and funding infrastructure and construction. In 2020, it expects to have invested £800m in its development pipeline across the UK and Europe. 

The magnitude of Segro’s land purchases have given it an advantage, says Numis (NUM) director of real estate research, Robert Duncan. “You have to own the land today,” he says. “It’s very, very hard gaining planning consents at the moment.”

The scale of Segro’s portfolio has contributed towards the premium attached to the shares standing at 20 per cent versus forecast net asset value at the end of December. That compares with discounts of 7 per cent and 6 per cent for much smaller peers Warehouse Reit and Urban Logistics (SHED), respectively. For Segro, much of the anticipated rental growth is already reflected in the substantial premium attached to the shares versus NAV, argues Mr Duncan. “It’s all in the shop window,” he says. 

The same cannot be said for this year’s other high achieving shares in the social housing and care sector. Civitas, Triple Point and care home landlord Impact Healthcare Reit (IHR) have re-rated over 2020, but that has merely closed the gap between their respective share prices and net asset values. 

Those gaps had emerged due to concerns around the security of the rental income generated by each group. For Impact that was the covenant strength of the care providers with whom it signed leases of 20 years or more. Similarly, for Civitas and Triple Point wariness stemmed from a 2019 report from the Regulator of Social Housing that raised concerns about the financial stability of some housing associations and governance shortcomings. 

Since then housing associations have made big improvements, with renewed emphasis on the quality of board appointments and financial risk planning, says Liberum analyst Conor Finn, and the market has responded accordingly. “The perception of the quality of that income has improved,” says Mr Finn. 

In a year when dividends were cut or scrapped altogether by most commercial landlords, investors have been lured towards the inflation-linked dividends on offer. Over time there’s definitely scope for these Reits to be trading at a modest premium to NAV, says Mr Finn and the best way that they can achieve that is by demonstrating the improvements in the security of the income generated by the portfolio. But he adds: “I don’t think we are going to see many years of 20 per cent plus share price return, it’s long-term income.”

Forecast rental value growth (%)

So should investors place faith in the same names for outperformance next year? For dividend security, logistics, social housing and healthcare Reits look likely to continue to deliver. Yet the greatest gains could come for those willing to bet on the recovery of shares in sectors beaten up by negative sentiment in 2020. Most retail property groups look like value traps, but prime London office landlords such as Helical (HLCL) and Derwent London (DLN) could have great re-rating potential. 

Top 15 performers