Custodian Reit pounces on high street retail as rents rise for first time in four years

The £441m diversified property trust has spotted rents rising on prime high street retail sites and snapped up two properties in central Winchester for £3.65m.

Custodian (CREI ) real estate investment trust (Reit) has identified that rents on prime high street retail sites are rising for the first time in more than four years, snapping up two properties in central Winchester for £3.65m.

The £441m 161-strong portfolio managed by Richard Shepherd-Cross had minimised its exposure as the coronavirus pandemic affected footfall, with the portion of assets classed as high street retail dwindling to a low of 7% by June last year. 

However, the team has changed tack, noting a 2% growth in like-for-like rental values in the six months to the end of March this year.

Standing in the shadow of Winchester Cathedral, the properties, which will be let to Nationwide Building Society and Hobbs, have an aggregate current passing rent of £249,200 per year, reflecting a net initial yield of 6.41%. The acquisition was funded by Custodian’s existing debt facilities, resulting in net gearing increasing to 20.5% loan to value.

‘We are delighted to have secured this property on Winchester’s city centre’s prime retail pitch, which remains a sought-after location with occupation levels well above average,’ said Shepherd-Cross (pictured below).

‘We have recently seen prime high street retail rents improving for the first time in over four years and we feel this asset is a positive addition to our diversified portfolio at an attractive yield, well above Winchester’s historical average.’

Since 2016, the broadly diversified Reit has placed more emphasis on out-of-town warehousing over high street retail, which has been a boost to performance.

Per the May factsheet, retail warehousing holds a current 21% portfolio weighting, but the sector has registered a more muted 0.3% growth in rents over six months, according to Custodian Capital. 

‘We see opportunities on prime high streets and in out-of-town retail warehousing where rents are in a recovery phase and we still see value in regional city centre offices,’ Shepherd-Cross said, speaking at an investment conference this month. 

The 5.6%-yielding fund has made 17 acquisitions worth £69.1m since August last year. Five of these were offices, five were industrial and three were retail warehouses, plus four retail sites including the Winchester buys. 

Custodian has had a bumpy start to the year with the shares returning -4.4%, versus the 8.6% average gain for rival trusts classified in the UK commercial property sector, according to Numis Securities. Underlying investments returns have been more robust at 7.3%, versus an 8.8% average, as the shares have derated and fallen to trade at an 18.5% discount.

Noting that as ‘one of the widest discounts to net asset value [NAV] we have seen’, Shepherd-Cross said it was a result of the thematic mindset that had been ‘such a strong focus in the property market’, playing into the hands of those focused on niche areas as opposed to the diversified Custodian. 

He commented that the board had discussed share buybacks in an attempt to narrow the discount and had not ruled out doing so in future.

Over three years, the closed-end trust’s shareholders have lost 1.4% versus a 10.3% sector average gain, according to Numis. Underlying investment returns have been better at 30.6% on an NAV basis versus a 29.1% sector average. 

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