Press coverage of the office property market focuses on eye-catching new-builds. But the main market is "secondary": the purchase, refurbishment, re-letting and management of existing buildings. This is the focus of real estate investment trust Regional Reit (LSE: RGL). It floated four years ago.
RGL's commitment to a progressive 8% yield plus a bit of capital return was treated with scepticism at first but the target for this year, 8.25p a share, is 8% ahead of the initial dividend. The total returnof 10% per annum sincelaunch makes its performance among the best in the sector. This impressive record has facilitated two fundraisings and resulted in a company with a £450m market value and £720m of assets.
Some of that success is the result of a strong in-house team, resulting in intensive management of properties, tenants and debt. There has also been a shrewd evolution of the portfolio, with the office component rising from 58% at launch to 78% .
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Eyeing up regional offices
Despite strong tenant demand and higher rents, RGL is finding a ready supply of high-quality opportunities from forced sellers. Inglis is convinced that in time "capital will be attracted back into regional offices, with rates of return for investors of 15% easily achievable". Meanwhile, RGL has a £500m pipeline of opportunities. £20m was invested in the first half and a further £26m recently. In current market conditions and with rents rising, sales are unusual, although a Sheffield property was sold for a 25% profit in the first half.
To enhance the investment return, the portfolio is financed by debt up to a limit of 40% of value. With secured debt of £292m at an average cost of 3.5% fixed for eight years, RGL is bumping against its ceiling and there is also a £50m unsecured bond issue. The loan covenants look secure, though the pipeline of opportunities suggests further equity issuance,which makes it hard to see the 9% discount of the share price to net asset value narrowing much.
Despite this, the record, strategy and prospects for RGL in its core market, with rents rising and values depressed, make it an attractive investment.
Max has an Economics degree from the University of Cambridge and is a chartered accountant. He worked at Investec Asset Management for 12 years, managing multi-asset funds investing in internally and externally managed funds, including investment trusts. This included a fund of investment trusts which grew to £120m+. Max has managed ten investment trusts (winning many awards) and sat on the boards of three trusts – two directorships are still active.
After 39 years in financial services, including 30 as a professional fund manager, Max took semi-retirement in 2017. Max has been a MoneyWeek columnist since 2016 writing about investment funds and more generally on markets online, plus occasional opinion pieces. He also writes for the Investment Trust Handbook each year and has contributed to The Daily Telegraph and other publications. See here for details of current investments held by Max.
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