Three funds to cash in on today’s real-estate megatrends
Professional investor Matthew Norris of the VT Gravis UK Listed Property Fund picks three real-estate investment trusts that track long-term themes.
UK real-estate equities have delivered stellar performances over the past decade, outperforming many asset classes, including equities, corporate bonds and gilts. To help spot the real-estate beneficiaries of the next decade it pays to identify the enduring socio-economic megatrends that will continue to shape the investment landscape.
We focus on five megatrends: the ageing population, digitalisation, generation rent, urbanisation and – overarching all of these – climate change, which sets the scene for identifying potentially attractive investments. Climate change is likely to result in a bifurcation in investment returns, with the greenest buildings being viewed as the most prime investments.
Rising demand for care homes
Those aged over 85 make up the fastest-growing age cohort in the UK. This is fuelling an increase in demand for both GP surgeries and care homes, which are exactly the types of assets owned and developed by some of the specialist real estate investment trusts (Reits). Impact Healthcare Reit (LSE: IHR) owns a portfolio of 126 high-quality care homes across the UK. It leases the care homes to operators on long leases, which are 100% inflation-linked.
The care-home market is highly fragmented and demand far exceeds supply of modern, purpose-built properties. Impact Healthcare also benefits from funding higher-returning development projects and undertaking asset management initiatives to improve the environmental quality of the assets. These favourable drivers enable the Reit to pay an attractive dividend yield of 5.2%, which is likely to grow over time in line with inflation.
A digital revolution
The digitalisation megatrend is being shaped by the fourth industrial revolution – a revolution of new technologies and big data, which is changing our lives and the ways in which we shop. Online sales now represent 26% of retail sales in the UK. A prime beneficiary of this trend is Tritax Big Box (LSE: BBOX), a specialist Reit that owns and develops large-scale logistics assets across the UK.
The growth in e-commerce has accelerated the demand for high-quality warehouse space in key strategic locations by tenants such as Amazon and Ocado. These tenants lease space on long leases with a large component of rent indexed to inflation. The Reit offers a growing dividend yield of 2.7% and aspires to more than double its net rental income through new developments over the next decade.
A better way to rent
Grainger (LSE: GRI) is benefiting from the generation rent megatrend. It is the clear market leader in the UK-listed private rental sector, with nearly 7,000 purpose-built residential properties. The company is both the owner and manager of its apartment blocks. It seeks to create a competitive advantage by offering its tenants good-value homes with a high level of service. This sets it apart from the typically poor rental experience in the amateur buy-to-let market.
Grainger currently offers a dividend yield of around 1.7%, which is well supported by a growing stream of apartment rental income. In addition, the company provides investors with exposure to a large and attractive development pipeline, capable of growing net rental income by around 2.5 times over the medium term.