Why should investors consider specialist REITs?
Investment trusts can be a great way of investing in property, given the relative illiquidity of property as an asset class and the long-term time horizons it entails. That’s why real estate investment trusts (REITs) have flourished since their introduction to the UK market in 2007 – writes Calum Bruce of Ediston Property Investment Company
But not all REITs are equal. Given the opportunities for active asset management that commercial property affords, we believe that specialist REITs can offer considerable attractions over generalist, benchmark-constrained REITs.
Commercial property is a diverse asset class. Accordingly, its component sub-sectors will often diverge widely from each other in their performance and prospects. At any given time, certain areas will languish while others flourish.
But REITs that follow a standard property benchmark will be shackled to the languishing parts of the market rather than focusing on the flourishing ones.
‘specialist REITs can offer considerable attractions over generalist, benchmark-constrained REITs’
Specialist REITs, on the other hand, have no such constraints. This means that they can focus on the areas where the managers believe valuations are most attractive and prospects are brightest.
This is especially important with UK REITs because of London’s inevitable dominance of benchmark indices. For example, following a standard property benchmark means accepting high exposure to the London office sector.
But this is an area that faces less certain prospects in the run-up to Brexit. Meanwhile, conventional high-street retail also looks unattractive as it wilts in the face of online competition. And while big logistics warehouses have done well in the past, they now look distinctly overvalued.
But rather than simply accept that an allocation must be given to each of these areas, specialist REITs – like Ediston Property (which we manage) – are able to try to avoid them.
We are a specialist in asset management and don’t subscribe to any property relative return benchmark so we’re free to focus on the areas where we see the greatest potential for sustainable income and steady capital growth.
‘we’re free to focus on the areas where we see the greatest potential for sustainable income and steady capital growth’
That’s a huge advantage in such a diverse asset class. We currently focus on the retail-warehousing sub-sector. This is an area that’s actually benefiting from the current shift towards e-commerce. And although we invest in the principal commercial property sectors, we don’t diversify for diversification’s sake. Instead, our focus is always on the potential for individual asset performance.
Another big advantage of specialist REITs is that they tend to be smaller. This allows them to be much more flexible and nimbler when shifting weightings between sub-sectors, because they have fewer properties to buy and sell. So they have a much smaller ‘turning curve’ than their larger peers.
This is important: no asset class stays the same over a given period, and it’s entirely possible that managers will want to shift allocations in anticipation of the changing fortunes of various sub-sectors. A large, REIT can be unwieldy and struggle to do this within an appropriate timeframe. In contrast, their smaller, specialist counterparts can be better equipped to reflect the evolving market environment.
But perhaps the most important advantage of specialist REITs is, in our view, in asset management.
‘We choose investments because they’re good, but we specialise in making them great’
Specialists like Ediston are small enough to engage in the active management of every asset in the portfolios which we manage. We choose investments because they’re good, but we specialise in making them great.
We do this through an intensive approach that’s much more focused and hands-on than our larger peers. This entrepreneurial approach means that we believe that we are able to get more value out of each property.
How do we achieve this? Well, no holding in portfolios which we manage is left to look after itself. We sweat the small stuff, and we do it at every level of the process – from developing new properties to ensuring that existing tenants are satisfied and that no opportunity for improvement is missed.
And because we’re small, we’re able to invest in properties that don’t meet the criteria for larger institutional investors and then develop them until they do. By eventually selling these assets on to institutional investors, we can capture a substantial increase in value that’s beyond the reach of our more cumbersome competitors.
‘the Ediston Property REIT currently offers an attractive yield, at 5.4%*’
This is where we bring the benefits of our experience to bear. Because we’re so tightly focused and highly resourced, our veteran managers are able to focus their efforts on between three and six assets each. And each of those managers has an average of two decades’ experience in the UK property market. Between them, our managers have deep knowledge of all sectors of the market, and that informs all the decisions we make as a team.
Our experience and specialisation are paying off for our clients. For example, the Ediston Property REIT currently offers an attractive yield, at 5.4%*, and has delivered strong NAV performance since inception. It also currently trades at a discount to NAV. We believe this offers investors a cost-effective way of harnessing the benefits of our experience and the potential of assets within the REIT. In a broad field like the UK property market, our narrow focus gives us a crucial edge.
- As at 31 December 2019.
The contents of this article should not be construed as legal, tax, investment or other advice. Each prospective investor should make its own enquiries and consult its professional advisers as to the legal, tax, financial and other relevant matters and risks concerning any investment opportunity.
Past performance is not a reliable indicator of future performance – the value of a stock market investment and any income from it can fall as well as rise and investors may not get back the amount invested.
Whilst information contained in this article is believed to be accurate at the date of publication, it is subject to change and does not purport to provide a complete description of Ediston Property Investment Company Plc (the “Company”) or its future prospects or performance. Any forecast, projection or target is indicative only and not guaranteed. In particular, the payment of dividends and the repayment of capital are not guaranteed.
The Company invests in property assets which can be highly illiquid, typically do not grow at an even rate of return and may decline in value, all of which may have a negative impact on the value of the Company.
To the fullest extent permitted by law, The Company, Ediston Investment Services Limited and their respective directors, advisers or representatives shall not have any responsibility or liability whatsoever for any loss (whether direct or indirect) arising from the use of this documents or its contents.
Issued and approved by Ediston Investment Services Limited which is authorised and regulated by the Financial Conduct Authority (FRN:706655)
Key facts (As at 31 December 2018)
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