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Our thoughts on UK real estate

In this third edition of the Multi-Manager People property review, it is pleasing to report the recovery in rents (and share prices) is well under way.
September 2021
Adam Norris

Adam Norris

Investment Analyst, BMO Multi-Manager People

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Risk disclaimer

Please note that this is a marketing communication and does not constitute investment advice or a recommendation to buy or sell investments nor should it be regarded as investment research. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of its dissemination. Views are held at the time of preparation.
Past performance is not a guide to future performance. Stock market and currency movements mean the value of investments and the income from them can go down as well as up and you may not get back the original amount invested.

In this third edition of the Multi-Manager People property review, it is pleasing to report the recovery in rents (and share prices) is well under way. After the wreckage of 2020, where most retail businesses were forced to close their stores, industrial units rearranged their workforce to maintain social distancing, and offices were deserted in almost apocalyptic fashion, it is encouraging that business is almost as usual for our listed property holdings.

To recap, as discussed in last year’s property review, we have focused our property holdings into areas that we believe have long-term demand support or where supply is constrained. Whether this is in care homes, which are unable to be speculatively built, or coffee drive-thru stations, which do not rely on a high-street footfall, these fundamental structures should continue to drive compounding rental growth over time and allow us to remain invested, regardless of short-term investor sentiment.

We continue to believe assets with long inflation-linked leases – a feature that each of our Real Estate Investment Trusts contain – are particularly valuable in an environment where inflation is moving materially higher, protecting the value of leases, and also as the yields available in corporate bond markets are once again close to historic lows.

A woman holding a red shopping basket

Supermarket Income REIT

Food retailers proved their defensive characteristics through 2020 by continuously paying their full rents, at a time when many consumer-facing businesses were refusing to pay rent or going cap-in-hand to their landlords for discounts.

Despite the re-opening of the economy which has seen individuals flocking back to pubs and restaurants (I assure you I have!) there has not been a retracement to normal revenue for the large food retailers. In fact, the large grocers are maintaining sales broadly 10% above their pre-Covid levels as shoppers enjoy more home dining.1

Supermarket Income REIT primarily acquires ‘omnichannel’ stores for the portfolio, with long inflation-linked leases. These are stores which:

  • Serve the local population with the traditional in-store method
  • Act as a local distribution hub to fulfil online grocery orders
  • Offer click and collect services
  • Are frequently located outside London and on the edge of major residential areas

We are excited by M&A activity in the UK equity market around food retailers. Morrisons, a tenant in the portfolio, finally accepted a private equity bid after a brief bidding war, at a chunky 58% premium to its year end share price. In addition, ASDA switched hands from Walmart to UK-based EG Group, who singled out the physical property ownership as a major attraction for them, using the property to secure advantageous financing rates.

With Supermarket Income REIT also owning an option for access to a large Sainsbury’s property portfolio due for lease renew in the next two years, we are particularly comfortable with the REIT’s focused and unique offering to the market.

Illuminated garden behind the house at night

Target Healthcare REIT

Distressing headlines about care homes reached their peak during the first half of 2020, during UK’s first wave of the pandemic, with around 27,000 excess deaths being recorded in the sector compared to the five-year average.2 That highly regrettable figure spurred changes in central and local government focus, ensuring those most vulnerable in our society were more effectively protected from Covid-19.
During the UK’s second wave of the pandemic, care homes had far more stringent practices in place to mitigate infection outbreaks, which included more adequate PPE, no face-to-face contact from relatives and plentiful testing of patients and staff. Excess deaths reduced to around 1,300 individuals3 – still an upsetting number but a substantial improvement from the first wave.

We continue to believe care homes are an important part of social care infrastructure, despite shortcomings in 2020. In addition, Target Healthcare REIT only purchases modern, purpose-built care homes where residents have their own en-suite wet room. We have long championed this advantage of Target Healthcare’s investment approach and it is something that has proven essential for residents to be able to isolate safely through the Covid-19 crisis and avert infection issues in the future.

Occupancy rates for the operators who lease Target Healthcare properties dipped somewhat in Q1 2021 during the UK’s second nationwide lockdown. With lockdowns easing, confidence returning to care home infection control and care home managers able to visit would-be residents to assess their individual needs, resident numbers have now increased five percentage points from their Q1 lows.

A woman is holding a fern in a pot

LXI REIT

LXI REIT proved to be our most commercially sensitive REIT through 2020, but the group have continued to recoup almost all of their missed rent collection and have since raised their dividend target in 2021.

We favour the management team’s true asset management of property, by disposing of properties that they deem to be fully valued and buying into new areas that are higher yielding with similar resilient characteristics – a positive trait we rarely find in the property market. Moreover, they are forward funding experts, which means they finance development without taking development risk – the developers are paid in instalments on completion and the REIT is sheltered from time delays.

The group have continued to raise new capital in the past year and, once again, have deployed this into areas that are relatively resistant to changing consumer trends or where there is structural demand in place. Recent examples include a forward funding agreement with Dobbies Garden centre, two Costa Coffee drive-thrus (taking them up to twenty-four different coffee units) as well as a sale-and-leaseback portfolio of twenty-three nursery schools across England. All deals were signed with inflation-linked leases, preserving the value of rents in an environment where inflation is at its highest point in the past ten years.

3 Ibid

Risk disclaimer

Please note that this is a marketing communication and does not constitute investment advice or a recommendation to buy or sell investments nor should it be regarded as investment research. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of its dissemination. Views are held at the time of preparation.
Past performance is not a guide to future performance. Stock market and currency movements mean the value of investments and the income from them can go down as well as up and you may not get back the original amount invested.
Use our handy glossary to look up any technical terms you are unfamiliar with.
Use our handy glossary to look up any technical terms you are unfamiliar with.

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