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AEW UK ups loan limit as property prospects worsen

9 October 2019

Real estate investment trust raises its maximum loan-to-value to provide it with headroom should commercial property prices slide after a no-deal Brexit.

AEW UK Reit (AEWU) has increased the maximum loan-to-value (LTV) allowed in the fund, providing it with headroom should commercial property prices slide after a no-deal Brexit.

The £138 million real estate investment trust (Reit) has amended its loan covenant to allow it to operate on an LTV of 55% rather than 45%.

Lifting the maximum ratio of loan to assets will make it less likely of a run-in with its lender, Royal Bank of Scotland International, should the property market tumble if the government defies Parliament and the UK crashes out of the European Union at the end of the month.

Breaching a covenant can see an investment trust forced to sell assets to restore the loan-to-value to a lower level. In a falling market that can lead to a dangerous, downward spiral, a risk that Woodford Patient Capital Trust (WPCT) hoped to avoid last month when it obtained the agreement of its lender to be flexible on the terms of its loan covenant.

However, it did grant Northern Trust, the provider of its £150 million credit facility, a veto over any new investments.

This is the second Brexit-related financial manoevering by a Reit in two days. Yesterday Schroder Real Estate (SREI) restructured its debts, not so as to reduce their size, but to give it more flexibility to buy cheap properties in a correction and to raise its dividend.  

The board was quick to point out that AEW UK Reit’s maximum level of gearing as a proportion of overall assets and anticipated level of total borrowing remained unchanged at 35%.

At the end of June it reported a loan to gross asset value of 25.4% and a loan to net asset value, excluding the debt, of 33.7%.

Fund manager Alex Short said the amendment ‘provides the company with a cost-effective way of reducing risk in its debt position’.

‘We will continue to keep gearing at conservative levels,’ she said.

The portfolio is made up of 35 properties, almost half of which are in the industrial sector, a fifth in offices, 15% in alternatives, and 15% in retail, which has been at the sharp end of a commercial property slump.

A drop in high street footfall and the proliferation of online shopping combined with high rates has sent retail property into a tailspin and a swathe of company voluntary agreements (CVAs) that have forced landlords into deep rent cuts.

Retail isn’t the only sector that has struggled, with transactions in London offices hitting a 20-year low in the second quarter of the year on the back of Brexit woes, according to estate agent Savills.

The overall commercial property market, as measured by the MSCI IPD UK index, has risen just 1.6% this year, with only the rental income from properties keeping the benchmark in positive territory.

The move by AEW UK indicates investors anticipate a more pronounced fall if Brexit and economic uncertainty worsens.

Numis Securities analyst Sam Murphy said: ‘Against a challenging market backdrop, increasing the covenant level provides further headroom to withstand capital value declines.’

Launched four years ago AEW UK specialises in smaller properites across the country under £15 million. Despite the difficult conditions this year, it has beaten the IPD index with a 3.6% gain in net asset value.

The trust currently pays a 2p quarterly dividend, covered by earnings, which at today's share price provides a high 8.8% yield.

The shares added 1.2p to 92.2p today, up over 8% since the start of the year and leaving shareholders with a total three-year return of 17.7%. They stand at a 7% discount to their estimated net asset value of 98.1p, according to Numis. 

Short and her employer AEW UK Investment Management are set to lose their contract to run small sister Reit AEW UK Long Lease (AEWL) following a review by the board after it was hit earlier this year by one of its bigger tenants falling into administration 

Investment company news brought to you by Citywire Financial Publishers Limited.


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