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Reits recovery persists as AEW and Schroders outperform

19 November 2020

UK real estate is coming back to life, with Schroder Real Estate and AEW UK both delivering outperformance in their half-year results.

Real estate investment trusts (Reit) are putting a difficult year behind them, as AEW UK (AEWU ) continues to benefit from warehouse exposure and Schroder Reit Estate (SREI ) edges its dividend closer to pre-Covid-19 levels.

Half -year results from both UK commercial property trusts revealed a recovery in the real estate market after the coronavirus crash.

AEW UK, winner of a Citywire investment trust performance award this month, reported a net asset value (NAV) total return of 3.9% for the six months to 30 September, taking the NAV per share to 92.7p despite a small portfolio valuation decline of 1.7% as retail property continues to weigh.

The fall was more than offset by the sale of the trust’s largest asset, a car park in Corby, at a premium of 25% to book value. The group also secured a 30% uplift on rent on a 15-year lease renewal with the Secretary of State for Communities and Local Government in Solihull.

Manager of the £123m trust Alex Short said its weighting to industrial and warehouse properties – to which it is 53% exposed – means the fund should benefit from the acceleration of the structural shift towards online shopping that has been brought about by the Covid-19 outbreak and subsequent lockdowns.

‘Given this weighting, the company expects to continue its current trend of outperformance against the UK commercial property market as a whole,’ she said.

‘The high exposure to this sector is expected to continue to provide a resilient outlook for the company’s major performance indicators…despite wider economic uncertainty.’

She added that industrial exposure has also ensured rent collection for the trust can ‘well exceed 90% in each quarter’.

Rent collection is a key determinant to whether a trust is able to pay its dividend and AEW UK – which is currently trading at a discount of 15.5% and pays a yield of 10.3% – has maintained its 8p per share full-year dividend.

However, chairman of the trust Mark Burton warned that future dividend payments will be determined by ‘the circumstances prevailing at the relevant time’.

Short said economic recovery would depend on a vaccine, while ‘a no-deal Brexit scenario will also pose a risk’.

Investors in Schroder Real Estate, the £200m trust whose manager Duncan Owen will be leaving at the end of the year, have experienced the pressure that dividends have come under this year as it first cancelled its dividend before reinstating it again at half the previous level.

In its interim results to 30 September, the trust has increased the dividend to 75% of its previous level, equivalent to 0.575p per share but chair Lorraine Baldry said future distributions will be ‘dependent on progress with rental collection rates, acquisitions, and other earning accretive activity’.

The fund has outperformed relative to its MSCI property benchmark, despite seeing the NAV total return ease 0.3% lower as the index slid 1.3%.

Baldry said a strong balance sheet and diversified portfolio – which sees the listed fund invest in 39 assets with 294 tenants, with  focus on regional offices in ‘winning cities’ and multi-let industrial warehousing – means it is ‘well positioned to manage the uncertain environment’ and it is emphasising sectors that will benefit from the economic recovery.

Owen, who has managed the trust for 16 years since its inception, said a number of ‘strategic initiatives’ completed last year, including the disposal of £95m of assets and the refinancing of the company’s long-term debt to reduce interest cost.

‘We are now focused on the disciplined use of capital via acquisitions and share repurchases to drive shareholder returns,’ he said.

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

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