Three commercial property funds that go beyond offices and shops

The property market has made a pedestrian recovery from the pandemic. The MSCI World index has rebounded by 30% over the past year, whereas one of the key property industry measures, the IPD UK index, is up by a mere 4%.

The recovery in the listed real-estate investment trust sector (these trusts are known as Reits) has been more pronounced, but is still a tad underwhelming. Reits are up by 24.8% overall, while the average gain in global equity funds is over 40%, according to data from the funds team at Numis, a stockbroker.

You can see why there might be some lingering caution. I’m still not sure how the pandemic will affect the core sectors of offices and retail over the longer term. Take demand for offices. There will be a structural shift towards more homeworking, but I’d be sceptical about bold claims for a fundamental shift out of the big cities. Similarly, in retail we could see high streets bounce back.

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Given the uncertain outlook I am wary of bulls who insist that property funds are cheap. That said, there are opportunities emerging in specialised niches. Here are three funds that have produced strong numbers in recent weeks by concentrating on assets outside the mainstream office and retail market.

Resilient industrial properties

One to consider is Stenprop (LSE: STP). This is a fund undergoing a transition, with a renewed focus on a core UK multi-let industrial (MLI) portfolio. These assets consist of myriad industrial estates, which have proved to be fairly resilient.

Even during Covid-19, demand and rents held up. According to recent numbers from Stenprop, over the last quarter rents actually increased by 1.8% (following a 0.8% rise in the previous three months), with the one-month increase at 5.6%. Vacancy rates have also been falling and the occupancy rate now stands at 93.7% (from 93.1% on 31 December). Crucially, rent collection is not far off normal; it reached 90% during the Covid-19 crisis.

Over the last few years the fund has been selling its legacy portfolio of European assets to focus on the British MLIs.

With the recent sale of a German retail portfolio, Stenprop is now over 75%-invested in MLIs.

That shift is also being reflected in a planned move from the specialist-funds segment of the stock exchange to the main market. The yield is around 4.5% and although the fund trades at a 5% premium to its net asset value (NAV), many of its peers trade at a 10% one.

Helping the homeless

Home Reit (LSE: HOME) has just released very positive numbers showing that the fund’s NAV has risen by 4.8% since its launch last year (when it raised £240m). The portfolio is focused on providing accommodation for the homeless.

The recent results gave us some useful insight into its operating model. As of the end of February, Home Reit had 3,019 beds across 572 properties, valued at £243m in total. These properties are in turn let to 15 registered charities and one housing association through inflation-linked leases.

As for the tenants, their rent is funded by the government and the properties are 100% let. Rents are around £86 a week, or 45% of the total housing benefit received by the tenant.

Across the whole portfolio, the net initial purchase yield (net operating income divided by gross purchase value) is just under 6%, with the fund targeting a dividend of 2.5p for the first financial year to 31 August 2021 and a minimum dividend of 5.5p for the subsequent financial year. The shares trade at a 10% premium to NAV.

We are going to need to spend far more on social housing, and although most of that money will come from the state, private-sector providers such as this fund will also have to help. Returns will never be spectacular and arguably shouldn’t be: privately backed social housing shouldn’t be seen as exploiting the taxpayer or residents. Home Reit’s sensible single-digit returns look spot on.

Rebuilding Berlin

Finally, there is Phoenix Spree Deutschland (LSE: PSDL), an investor in German residential real estate. Its focus is on residential property in Berlin; it splits up old Communist-era residential blocks into flats and then sells them on. That seems straightforward in the hot Berlin market, but last year the local government imposed rent controls and price limits.

A victory for common sense

The fund’s share price took a hit, but in the last few weeks there has been good news. The German courts have struck down the law and so we are back to a free market.

Although rent controls sound very appealing, especially for tenants having to pay more, history shows that they are counterproductive because they reduce supply. If you have a tight market, the answer is to build more.

Talk of rent controls hasn’t completely gone away, however, and I wonder how the affected landlords handle the recovery of lost rents they were owed before this law came in. An aggressive campaign to secure the cash could rekindle the political battle.

At Phoenix the ruling coincided with some solid annual numbers on the €768.3m portfolio, which showed a 5.2% year-on-year increase in value. Covid-19 doesn’t seem to have had a major impact, with lost income only around 4%, while the fund can now get back to its core strategy of splitting up those blocks into condominiums.

Over 70% of PSDL’s portfolio has already been legally split into condominiums, with a further 15% in application. The fund pays a dividend of 7.50 cents, which has increased, or been maintained, every year since the group’s flotation in June 2015.

There’s some debt on the balance sheet, but it is manageable with a 33% debt-to-equity ratio and there is also the chance that following this court ruling the value of its property could be reset higher.

Given a 20% discount to NAV I think that could have a major impact. A portfolio focused on the manufacturing (and increasingly political) powerhouse of Europe has to be a decent long-term bet.