AEW UK to exercise ‘caution’ on industrials after strong run

Real estate fund manager Laura Elkin looks to deploy more in retail and leisure sectors after industrial properties power her trust to a 30% investment return in the year to 31 March.

AEW UK Reit (AEWU ) has outpaced its generalist real estate investment trust rivals with a near 30% rise in its portfolio as it cashes in on the industrial boom.

Fund manager Alex Short left the £188m trust in fine shape when she resigned last month as the two-time Citywire award-winner this week reported a 29.7% increase in net asset value (NAV) including dividends in the year to 31 March.

Shareholders will have been even more pleased by their 53.6% total return and the continuation of the 8p per share dividend, which has been paid for the sixth consecutive year – providing a 6.8% yield.

Chairman Mark Burton said the returns were driven ‘partly by the removal of pandemic restrictions but also by our investment manager’s strategy which combines defensive positioning, identifying assets with shorter unexpired lease terms that are often mispriced, and active asset management of the portfolio’.

Laura Elkin, who has stepped up as lead fund manager, said the industrials sector – which made up half of the fund’s value at the end of March – had provided a total return of nearly 35%.

However, she said while the strong demand had boosted value and compressed yields, she felt a number of the asset values had been ‘maximised’ and disposed of two industrial properties, making gains of £16m.

Elkin (pictured) said she will ‘exercise caution when analysing pipeline assets in the sector’ but the compelling attributes continue to be ‘historically low levels of availability of accommodation and continued strong tenant demand’.

‘It is these attributes which continue to drive rental growth and with the portfolio’s average passing rent within the sector being only £3.30 per square feet we believe that we are ideally placed to be able to benefit from this,’ she said.

The proceeds of the industrial sales were reinvested into retail warehouse and leisure sectors, with the purchase of a retail park in Coventry at a net initial yield of 11% and the Pryzm nightclub in Cardiff, which offers a 7.7% yield.

Elkin said the leisure sector had suffered ‘significant strain’ during the pandemic but as the restrictions eased, she was drawn to ‘properties that occupy larger land holdings or sites in economically active areas that can often be underpinned by alternative use values’.

Retail also had a tough time during the pandemic but ‘retail warehousing has generally been significantly stronger’ than the high street.

‘We are attracted to assets located within established commercial locations with low passing rents and particularly where values for warehousing assets have been surpassed by those within the existing use,’ said Elkin.

However, she added that the high street has ‘stabilised somewhat’ and the sector is ‘likely to offer opportunities for repurposing to alternative uses over the medium term’.

Conor Finn, analyst at Liberum, the trust’s corporate broker, said AEWU was ‘well placed to maintain its double-digit NAV return profile’.

‘Recent acquisitions have demonstrated the manager’s ability to source attractive assets with considerable downside protection,’ he said.

‘The portfolio offers c.20% reversionary upside and the shorter average lease lengths provide catalysts to capture rental growth. We expect AEW’s outperformance relative to peers will continue.’

At 117p today, AEWU shares stand at a 2.5% discount to their end of March NAV per share of 120.1p. However, the £37m sale in April of Eastpoint Business Park adds 11p to NAV per share, Finn said, widening the discount to 10.7%.

 

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