Multi-Manager

The Multi-Manager People: Our thoughts on UK real estate

An overview of our thoughts on UK real estate
August 2020
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Risk Disclaimer

The value of investments and any income from them can go down as well as up and investors may not get back the original amount invested.

Views and opinions have been arrived at by BMO Global Asset Management and should not be considered to be a recommendation or solicitation to buy or sell any companies that may be mentioned.

The information, opinions, estimates or forecasts contained in this document were obtained from sources reasonably believed to be reliable and are subject to change at any time.

Following on from last year’s property market review, not a single market participant could have predicted the rollercoaster ride of property investing in 2020. No sooner was the Brexit standoff resolved than the whole world economy entered a deep recession, questioning both the capital and rental values of property assets across the board.

The pain, so far, has been most acutely felt in an already ailing in-store retail sector. The trot towards online shopping turned into a gallop through COVID-19’s nationwide lockdown, with 32.8% of all retail sales moving online in May 2020, up from just 18.8% a year earlier.1

COVID-19 has also rapidly changed the location of work, with significant numbers of office employees currently working from home. Whilst many of us will hopefully return to the office in the next few months, the swift shift to home working proved successful, which questions the level of office space needed by companies.

To help ease the effects of the economic shutdown, the government injected huge state support to underpin incomes for households and SMEs. In addition, the government has protected renters across the UK by forbidding evictions in this crisis, recognising that a government-induced shutdown should be no reason why individuals should be forced from their homes. Perhaps an unintended consequence of this has been the adoption of this by lessors in the commercial space, where even cash-flush businesses have been slow to pay their rents, shining a light on whether a tenant truly is as high quality as perceived.

My previous review also highlighted how our focus in the past few years has been to determine long-term social or economic demand trends in relatively niche areas of the market. Ultimately, this demand should drive compounding rental growth over time and prove relatively resilient in a downturn.

Our holdings have by no means been completely unscathed from COVID-19 trauma, but neither do we think the longer term dynamics will be significantly impaired in the areas of the market they are operating in. I have highlighted how they have fared through the shutdown period and included the rent collection in each of the listed funds, which should provide some comfort to our continued ownership of the vehicles.

 

1 Office for National Statistics  

Risk Disclaimer

The value of investments and any income from them can go down as well as up and investors may not get back the original amount invested.

Views and opinions have been arrived at by BMO Global Asset Management and should not be considered to be a recommendation or solicitation to buy or sell any companies that may be mentioned.

Supermarkets

Supermarket Income REIT (Ticker: SUPR)

  • Multi-Manager original purchase date: April 2020
LS3 LS4 LS5 LS6 LS7 Distribution Cautious Balanced Growth

-

-

-

-

-

-

-

-

Rent Collection – Q1 2020 Rent Collection – Q2 2020

100%

100%

Few retailers have proved to be as resilient as supermarkets through COVID-19. Whilst their stores may have previously been considered big edge-of-town boxes and retailers historically operating on thin margins, it was striking how quickly supermarkets became central to governments ‘Feed the Nation’ strategy during the lockdown.

With many retailers adapting to the online environment, supermarkets have been operating their business models through a multi-channel offering for a number of years now.

Moreover, with more offices remaining empty and apprehension from consumers to return to restaurants, there has been a huge calorie shift from dining out to cooking at home. And despite the August ‘Eat Out to Help Out’ scheme, this is likely to take a while yet to normalise.

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 order
  • Offer click and collect services
  • Are frequently outside of London and on the edge of towns

Steve Windsor and Ben Green of investment manager Atrato Capital have a long history with supermarkets, having helped them move properties from their balance sheets through the 2000s. They now see the opportunity of having top-trading stores in a single portfolio to produce long-term, stable income. The rent collection through this period has been unrivalled in the market.

 

Source: Atrato Capital, as at August 2020

The information, opinions, estimates or forecasts contained in this document were obtained from sources reasonably believed to be reliable and are subject to change at any time.

The value of property related securities reflects the opinion of valuers and is reviewed periodically. These assets can also be illiquid and significant or persistent redemptions may require the manager to sell properties at a lower market value adversely affecting the value of your investment.

Supermarkets

Related capability

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Healthcare

Target Healthcare REIT (Ticker: THRL)

  • Multi-Manager original purchase date: February 2018
LS3 LS4 LS5 LS6 LS7 Distribution Cautious Balanced Growth

-

-

-

Rent Collection – Q1 2020 Rent Collection – Q2 2020

97%

96%

Care homes have hit the headlines during COVID-19 for many of the wrong reasons: inadequate PPE funding, a lack of testing and most tragically they represented nearly one-third of all deaths in care homes between the period 2 March – 12 June.2

Nonetheless, care homes remain an important part of social care infrastructure, despite the recent shortcomings. Infection rates are now more controlled, and confirmed or suspected cases of COVID-19 were affecting residents occupying less than 0.3% of beds within Target Healthcare’s portfolio on 1 August, down from a peak of 3.2% in mid-April.

The REIT only purchases modern, purpose-build care homes where residents have their own ensuite wet room. We have long championed this advantage of Target Healthcare’s investment approach and it is something which has proved essential for residents to be able to isolate safely through the COVID-19 crisis.

The REIT has also been on the front foot in helping care operators deal with the challenges in their homes, such as providing iPads for residents to video call their loved ones when visiting was prohibited. A relatively inexpensive gesture but one well received from operators and residents alike.

 

Source: Target Fund Managers, as at August 2020

Real Estate and Healthcare

Long-leased property

LXI REIT (Ticker: LXI)

  • Multi-Manager original purchase date: October 2018
LS3 LS4 LS5 LS6 LS7 Distribution Cautious Balanced Growth

-

-

-

Rent Collection – Q1 2020 Rent Collection – Q2 2020

90%*

90%**

LXi REIT is certainly our most commercially focused REIT, whose main area of expertise is in usually less cyclical areas of the market and often beneficiaries of economic downturns. Whilst much of the portfolio showed defensive qualities this year, such as budget retail, healthcare and key industrial units for corporates, others did not.

Budget hotels, which account for almost a quarter of portfolio, have faced an unparalleled decline in their revenues, which usually hold up reasonably well as consumers and corporates opt for cheaper stays. That said, the tenants themselves have proven to have quite different credentials – Premier Inn, owned by Whitbread PLC, have paid their rent in full throughout the pandemic, whereas Travelodge, which is private-equity backed, sought CVA protection, fuelling a standoff between landlords and the company.

The portfolio managers, Simon Lee, John White and Freddie Brookes, continue to impress through their disposals of assets, even when market transactions were few and far between. This active management enables the REIT to crystallise investment gains and deploy assets into better valued areas of the 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.

 

2Office for National Statistics
*Original rent collection at quarter end was 67%, rising to 90%.
**Original rent at quarter end was 84%, rising to 90%.

Long-leased property

The private rented sector

PRS REIT (Ticker: PRSR)

  • Multi-Manager original purchase date: October 2018
LS3 LS4 LS5 LS6 LS7 Distribution Cautious Balanced Growth

-

-

-

-

Rent Collection – Q1 2020 Rent Collection – Q2 2020

99%

98%

PRS REIT aims to provide institutional efficiency to the privately rented market. With the UK economy’s ground to a halt in April and May, it would be easy to think the fund’s rental collection could come under pressure as households struggle to pay their bills.

Quite the reverse has been true of PRS REIT. Whilst some of the trust’s rent collection can be attributed to enormous support through the government’s furloughing scheme, the trust’s focus on affordable rent has also enabled collection to be relatively resilient in the face of a sharply slowing economy. 

One issue outside of the REIT’s control has been the development assets which are still yet to be at fully capacity, due to social distancing requirements on sites. This has put pressure on the share price in recent months, but we hope this delay should prove to be temporary. The REIT have announced they are now looking to deploy capital into already built portfolios, to improve divided cover.

 

Source: Sigma Capital Group, as at August 2020

Real Estate - Private rent sector

Holiday parks

Darwin Leisure Property Fund (DLPF) & Darwin Leisure Development Fund (DLDF)

  • Multi-Manager original purchase date: DLPF – March 2008, DLDF – April 2018

Held in portfolio:

DLPF

LS3 LS4 LS5 LS6 LS7 Distribution Cautious Balanced Growth

-

-

-

DLDF

LS3 LS4 LS5 LS6 LS7 Distribution Cautious Balanced Growth

-

-

-

A property review from BMO Multi-Manager team wouldn’t be complete without a mention of our longstanding relationship with Darwin Investment Managers. The leisure sector has faced enormous pressure this year as discretionary spending from households has been suppressed to a minimum – April 2020 was the quietest period for Darwin’s parks on record.

However, with the threat of quarantine when returning from overseas still looming over some of UK’s favoured travel destinations, households have looked for holiday destinations without the need to fly – good job it’s been a scorching summer!

The built sites (predominantly DLPF) have still not been able to operate at full capacity, with the common bar area and pools closed when the sites initially reopened. However, that has not stopped record August bookings across many of the sites, with little need for discounting.

The fund itself is hoping to pay a reduced dividend this year. We support management’s decision to do this so as not to overextend the business’s financial position, and we hope many first-time staycationers will return in the summers to come.

Source: Darwin Alternatives Investment Management, as at August 2020

Real Estate - holiday parks

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