What’s happening to property valuations?
The valuers have declared ‘material uncertainty’ across all sectors, affecting asset valuations for all holders of UK commercial property. Although transactions are still going ahead, there is an issue of parties’ ability to transact as a large part of the due diligence process cannot be carried out if physical inspections of properties cannot take place. Furthermore, the valuers stated that after the government announcements, it was clear there was more uncertainty over the ability of many commercial occupiers to continue trading and operating from their buildings. The situation will be kept under constant review by the valuation community.
Will the Fund still be able to price its property assets and publish the daily NAV? Yes. The Fund’s independent valuers, Knight Frank LLP, will still value the property portfolio monthly and equity holdings will price daily. We will continue to issue a daily NAV as usual.
Will the Fund still distribute income?
What are the steps to take for the Fund to reopen?
The suspension is very much a temporary situation. However, the suspension will be in place so long as there is ‘material uncertainty’ declared on the Fund’s property valuations by the independent valuer in order to comply with the FCA’s requirements. As stated, this is not a liquidity event and we will be taking steps to reopen the Fund as soon as material uncertainty is lifted.
How will the Fund be managed through the suspension?
There will be no change in how the fund is managed and the team is working as hard as ever. During the period of suspension, the managers will continue to actively manage the underlying portfolio, and we will be monitoring the market closely to provide further updates to our investor base.
Has there been an effect on the underlying liquidity of assets? We are constantly monitoring the Fund’s liquidity and there has been no major change since 21st February. 61% of the equity portfolio can be liquidated in 2 working days, and 95% in 20 working days (assuming 30% of 3-month average daily volume)*.
What is the Fund’s current positioning?
- 10% Cash
- 31% Physical Property
- 59% Equities;
– 22% UK equities
– 37% European equities
What is happening in the equity market?
The pan European real estate equity market has experienced similar levels of decline as the wider equity market since the markets began to weaken on 19th February (following the confirmation of cases of COVID-19 in Italy). However, there has been plenty of dispersion in returns between different asset groups as well as a wide range of performance at the individual stock level. Unsurprisingly those companies exposed to hotels, entertainment venues, restaurants and retail have performed the worst whilst those with the lowest leverage and the highest quality income streams (both in terms of lease length and covenant quality) have performed the best.
The portfolio’s UK equity assets comprise healthcare (Assura, PHP and Target Healthcare) alongside industrial and logistics assets though Tritax Bigbox and London Metric. Our long income exposure is through Secure Income REIT and Supermarket Income REIT. These sectors have proved the more resilient areas of the market. Across Continental Europe, we have some exposure to shopping centre owners and these have, of course, been hit very hard by the compulsory closure of malls. Collectively, these companies are 10% of our assets. At the same time, a further 10% of our assets are in German residential companies. German residential, alongside healthcare have proved to be highly resilient performers.
What is the make-up of the physical property portfolio?
The physical portfolio is 71% industrial and 29% office, with ZERO retail, leisure, hotel or restaurant exposure.
What is happening in the physical property market?
The physical property market is still open for business, particularly for industrial and office assets but less so for retail. In our portfolio this week, we have agreed terms on a large lease renewal of a 100,000 sq ft industrial building and we have also placed a vacant office suite under offer to let with no weakness in the terms achieved. Both are now in solicitors’ hands. In addition, we have also conducted viewings of vacant space and opened new negotiations to let space in the last 48 hours. We will obviously continue to work with our tenants and support them through this difficult time. The scale of the pandemic is unprecedented, and so will the government response need to be. In the same way that we are communicating with investors we are also in constant communication with our tenants. We have a long-term relationship with our tenants, and we will take a pragmatic view towards temporary assistance in helping them out over the coming weeks. These measures could include the payment of rent on a monthly basis, rather than quarterly, rent deferments, or in extreme cases, limited rent-free periods. The portfolio’s large weighting to industrial means that our tenants are more insulated from the social distancing measures that are affecting the retail and leisure sectors, and are much less reliant on direct customer contact for their revenue streams. We would like to thank investors for all their support through this difficult time and we are available for one-to-one calls should you want them.
Marcus, George and The Team
*As at 18-Mar-20