Subscribe
Sign up for timely perspectives delivered to your inbox.
A glimmer of recovery in UK real estate: Henderson High Income
A tentative recovery in rental income for UK commercial real estate could prove positive for Henderson High Income…
12 Aug 2024
7 minute read
7 minute read
Key takeaways:
- UK commercial property REITs have experienced a ‘lost decade’ following several structural challenges.
- An improving economic picture and turning rate cycle could trigger a turnaround for the sector.
- We hold a range of REITs, with the improving outlook for rental income and property values providing potential income and capital growth.
One rule of Henderson High Income’s approach to income is that investing in a range of yield generators is useful. This is evident in the trust’s structure, combining equities with some fixed income. But it is also shown in our equity portfolio.
A segment that offers a very differentiated source of income return within the HHI portfolio is commercial real estate. We believe investors in UK real estate income trusts (REITS) have experienced a ‘lost decade’ with share prices rising little in the last ten years.
There are a few reasons for this. First, UK economic growth has been sluggish in that time. Second, Brexit and political instability has left foreign investors shying away from investing in UK property. Thirdly, the increase in shoppers moving online has impacted traditional bricks and mortar retailers. This was then exacerbated by the pandemic, which saw the collapse of some large retailers and falling demand for office space. As a result, property values declined.
Sunnier skies for UK property?
However, a recovering economy could present an opportunity for the property sector. Already in May and June property capital values rose modestly, according to IPD data. This is likely to be partly driven by the anticipated cut in interest rates later this year. But it also reflects the resilience of the current tenant base after a challenging economic period. It also comes as working and leisure patterns settle down post-pandemic.
We believe that rate cuts could lead to further increases in property values. In turn, this improving sentiment could be positive for the diversified REITs, which currently sit at an average discount of nearly 30% – well above historic norms.
The management teams of REITs themselves appear more confident in their commentaries. Reaffirming this was a £350m rights issue from Great Portland Estates, announced in May, and a £450m equity raise by Unite more recently. Both have raised this money to take advantage of what they believe are ‘trough’ property values.
The investment case
For us, one of the most attractive features of REITs remains their yield potential. Current Henderson High Income investments British Land and Land Securities pay attractive dividends with yields of 5.5% and 6.3% respectively. Should rental growth be in recovery mode – as we believe it is – the income outlook for the sector looks positive.
An alternative class of commercial real estate is self-storage. Henderson High Income invests in Big Yellow Group, which saw a boost in both occupancy and rents in its second-quarter results.
Its pipeline of new locations is well-established, with the majority granted planning permission. This gives some insight into the company’s expected future revenue. Big Yellow has a slightly lower dividend yield of around 3.8% but offers healthy dividend growth potential.
Glossary
Bond (fixed income)
A debt security issued by a company or a government, used as a way of raising money. The investor buying the bond is effectively lending money to the issuer of the bond. Bonds offer a return to investors in the form of fixed periodic payments (a ‘coupon’), and the eventual return at maturity of the original amount invested – the par value. Because of their fixed periodic interest payments, they are also often called fixed income instruments.
Discount
Refers to a situation when a security is trading for lower than its fundamental or intrinsic value. The opposite of trading at a premium.
Dividend
A variable discretionary payment made by a company to its shareholders.
Economic cycle
The fluctuation of the economy between expansion (growth) and contraction (recession), commonly measured in terms of gross domestic product (GDP). It is influenced by many factors, including household, government and business spending, trade, technology and central bank policy. The economic cycle consists of four recognised stages. ‘Early cycle’ is when the economy transitions from recession to recovery; ‘mid-cycle’ is the subsequent period of positive (but more moderate) growth. In the ‘late cycle’, growth slows as the economy reaches its full potential, wages start to rise and inflation begins to pick up, leading to lower demand, falling corporate earnings and eventually the fourth stage – recession.
Equity
A security representing ownership, typically listed on a stock exchange. ‘Equities’ as an asset class means investments in shares, as opposed to, for instance, bonds. To have ‘equity’ in a company means to hold shares in that company and therefore have part ownership.
Real estate investment trust (REITs)
An investment vehicle that invests in real estate, through direct ownership of property assets, property shares or mortgages. As they are listed on a stock exchange, REITs are usually highly liquid and trade like shares. Real estate securities, including REITs may be subject to additional risks, including interest rate, management, tax, economic, environmental and concentration risks.
Rights issue
An offer made to existing shareholders that provides an opportunity to buy additional new shares, usually at a discount to the market price. Investors can choose to purchase these shares, or sell the right to purchase those shares, but a rights issue can dilute the value of existing holdings for those investors who choose to not participate.
Share price
The price to purchase (or sell) one share in a company, not including fees or taxes.
Yield
The level of income on a security over a set period, typically expressed as a percentage rate. For equities, a common measure is the dividend yield, which divides recent dividend payments for each share by the share price. For a bond, this is calculated as the coupon payment divided by the current bond price.
Past performance does not predict future returns. There is no guarantee that past trends will continue, or forecasts will be realised.
Disclaimer
References made to individual securities do not constitute a recommendation to buy, sell or hold any security, investment strategy or market sector, and should not be assumed to be profitable. Janus Henderson Investors, its affiliated advisor, or its employees, may have a position in the securities mentioned.
Not for onward distribution. Before investing in an investment trust referred to in this document, you should satisfy yourself as to its suitability and the risks involved, you may wish to consult a financial adviser. This is a marketing communication. Please refer to the AIFMD Disclosure document and Annual Report of the AIF before making any final investment decisions. Past performance does not predict future returns. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested. Tax assumptions and reliefs depend upon an investor’s particular circumstances and may change if those circumstances or the law change. Nothing in this document is intended to or should be construed as advice. This document is not a recommendation to sell or purchase any investment. It does not form part of any contract for the sale or purchase of any investment. We may record telephone calls for our mutual protection, to improve customer service and for regulatory record keeping purposes.
Issued in the UK by Janus Henderson Investors. Janus Henderson Investors is the name under which investment products and services are provided by Janus Henderson Investors International Limited (reg no. 3594615), Janus Henderson Investors UK Limited (reg. no. 906355), Janus Henderson Fund Management UK Limited (reg. no. 2678531), (each registered in England and Wales at 201 Bishopsgate, London EC2M 3AE and regulated by the Financial Conduct Authority), Tabula Investment Management Limited (reg. no. 11286661 at 6th Floor, 55 Strand London WC2N 5LR and regulated by the Financial Conduct Authority) and Janus Henderson Investors Europe S.A. (reg no. B22848 at 78, Avenue de la Liberté, L-1930 Luxembourg, Luxembourg and regulated by the Commission de Surveillance du Secteur Financier).
Janus Henderson is a trademark of Janus Henderson Group plc or one of its subsidiaries. © Janus Henderson Group plc
12 Aug 2024
7 minute read
7 minute read
Key takeaways:
- UK commercial property REITs have experienced a ‘lost decade’ following several structural challenges.
- An improving economic picture and turning rate cycle could trigger a turnaround for the sector.
- We hold a range of REITs, with the improving outlook for rental income and property values providing potential income and capital growth.