Find value in this Reit specialising in regional offices

This Reit focusing on opportunities in commercial property outside London looks appealing.

Manchester © iStockphotos

The supply of office space in regional cities such as Manchester is at a 12-year low

Manchester © iStockphotos

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% .

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.

Recommended

Scottish Mortgage Investment Trust update: share price down as tech stocks crash
Investment trusts

Scottish Mortgage Investment Trust update: share price down as tech stocks crash

Scottish Mortgage Investment Trust has been remarkably successful over the years but is now trading at a discount to its NAV due to falling tech stock…
28 Jan 2022
How to invest in the chipmakers fixing the semiconductor shortage
Share tips

How to invest in the chipmakers fixing the semiconductor shortage

Last year’s chip crunch brought home how dependent the world is on these tiny pieces of silicon. Chipmakers are rushing to build new factories. Will t…
28 Jan 2022
Share tips of the week – 28 January
Share tips

Share tips of the week – 28 January

MoneyWeek’s comprehensive guide to the best of this week’s share tips from the rest of the UK's financial pages.
28 Jan 2022
Energy stocks will only get better in 2022 – here are three to buy
Share tips

Energy stocks will only get better in 2022 – here are three to buy

Professional investor Jonathan Waghorn of Guinness Global Investors picks three top energy stocks.
28 Jan 2022

Most Popular

Shareholder capitalism: why we must return power to listed companies’ ultimate owners
Investment strategy

Shareholder capitalism: why we must return power to listed companies’ ultimate owners

Under our system of shareholder capitalism it's not fund managers, it‘s the individual investors – the company's ultimate owners – who should be telli…
24 Jan 2022
Temple Bar’s Ian Lance and Nick Purves: the essence of value investing
Investment strategy

Temple Bar’s Ian Lance and Nick Purves: the essence of value investing

Ian Lance and Nick Purves of the Temple Bar investment trust explain the essence of “value investing” – buying something for less than its intrinsic v…
14 Jan 2022
Three innovative Asian stocks to buy now
Share tips

Three innovative Asian stocks to buy now

Professional investor Fay Ren of the Cerno Pacific Fund highlights three of her favourite Asian stocks to buy now
24 Jan 2022