AEW UK eyes property bargains as valuations reach 30-year low

AEW UK Reit (AEWU ) has plenty to celebrate on its 10th birthday, not least an ‘exciting pipeline’ of opportunities to choose from across the commercial property market as valuations reach a 30-year low.

Manager Laura Elkin has been recycling capital from low-yielding properties into higher-yielding assets and describes the market as ‘really interesting at the moment’, particularly as average capital values are at their ‘lowest point’ in three decades.

‘We have been doing this for 10 years and…what is really interesting is not only are we at the lowest point in average capital values but we are clearly in a period of political uncertainty, and we find in those periods that more assets tend to trade off-market and there are lower investment volumes going through,’ she said.

The more assets that are trading at ‘opaque prices’ means there are fewer market participants, and with values ‘at the lowest since the company IPO’d’ there is an ‘exciting pipeline’ for Elkin to pick from.

She said the opaque market and lack of buyers means there are ‘more opportunities to buy mispriced assets’, which is a core part of her strategy.

A further boon for the commercial property sector should also come from falling interest rates, which will lower the cost of borrowing.

In Elkin’s opinion, the property market as a whole has seen a recovery in recent quarters. Although her trust hasn’t seen ‘significant value increases, we have seen it creep forward, and that has been driven by asset management and new income’.

‘All of that has helped us move values forward,’ she said.

‘There has been a change in sentiment and there are expectations of better total returns from the market as a whole in 2025…If there is a modest return [for the whole market] then I would expect us to show a similar, if not slightly better, return.’

Dividend cover

The five-time winner of the Citywire award for the best performance UK commercial property fund has kept ahead of its MSCI/AREF UK PFI Balanced Funds Quarterly Property index benchmark in every year since the fund was launched in 2015.

Its shares have performed well too. Over the past five years, it is the top performing Reit in the AIC’s UK commercial property sector with a 139.6% gain which compares to 15.8% by the sector average. It is the same story over one year: AEW’s shares are up 33% versus a 14.7% gain by peers.

The 7.8%-yielding trust confirmed in its half-year results for the six months to the end of September that it has covered its dividend for the first time in two years, having previously dipped into capital and reserves to top up its 8p full-year dividend.

However, Elkin said dividend cover has slipped over the first quarter to 1.7 times after the sale of its Central Six retail park in Coventry in December.

‘We are now very close to returning to full investment again, with one purchase in March and there is one coming imminently, and then we are fully invested,’ she said, adding that these purchases will return the Reit to full cover.

Elkin and her deputy Henry Butt have worked hard over the last three years to grow income, especially since the ‘low point’ that followed the disastrous mini-Budget from short-lived prime minister Liz Truss in 2022.

She said dividend stability remains a priority for her and the board, which can be achieved by growing the income generated by the portfolio.

AEW currently trades on a 5% discount to NAV.