Custodian Property Income (CREI ) is on the hunt for more acquisitions as it positions itself to take advantage of a market that is ‘past its inflection point’.

The failed bid for Abrdn Property Income (API ) last year failed to deter CREI manager Richard Shepherd-Cross who went on to snap up Merlin Properties, a private portfolio of 28 regional assets mainly in the industrial sector, for £22m and he is still hunting for more acquisitions.

In the latest quarterly update for the real estate investment trust (Reit), Shepherd-Cross said the Merlin acquisition allowed the trust to ‘scale and grow earnings despite capital market headwinds’, as well as enhancing shareholder value.

‘With a consensus that the market is now past its inflection point, we see real potential for valuation recovery to enhance total returns,’ he said.

‘Looking ahead, we will continue to pursue opportunities to invest in our existing portfolio and grow through selective corporate acquisitions, while actively recycling capital to strengthen the portfolio and increase net asset value (NAV).’

Custodian Capital’s Shepherd-Cross has already made significant headway recycling assets, including a retail unit in Leicestershire which was sold at auction for £400,000 – 28% ahead of purchase price. It had been part of the Merlin portfolio.

Elsewhere, he sold two offices in Cheadle for an aggregate £6.9m, representing a 12% premium to pre-offer valuation. A total of £2.4m was spent refurbishing an industrial building in Plymouth and Biggleswade and combining two units to facilitate a letting at a retail warehouse in Southport.

Solar panel installation across 12 buildings generated £100,000, as the fund sold the renewable energy generated to tenants and exported any surplus.

Green shoots

Over the three months to the end of June, the NAV total return was 2.2%, which included the 1.5p dividend per share that kept the Reit on track to deliver its annual 6p dividend target.

The value of the portfolio grew over the quarter, up 0.8% to give the properties a value of £615m, while the board also highlighted potential for further income growth.

Custodian’s estimated rental growth – the difference between current rents and the open market rent – is currently £51.5m, 15% higher than the current passing rent of £44.9m.

‘Based on our track record and strong occupier demand for space, we expect to capture this potential rental upside at typically five-yearly rent reviews or on re-letting, and will continue to drive passing rent and estimated rental growth further through asset management initiatives,’ said Shepherd-Cross.

The potential for rental growth was evidenced by the completion of two rent reviews at an average 25% increase in annual rent over the quarter. Seven lease renewals and regears were on aggregate 8% ahead of estimated rental value.

Shepherd-Cross said stable earnings meant the dividend was fully covered and the fund achieved an average rental uplift of 13.5%.

However, he said positive news in the property market is being overlooked, which explains why wide discounts have persisted. CREI currently trades at a 21% discount, above its year average of 17%. It yields a little under 8%.

‘The strong rental performance, coupled with resilient tenant demand and stable valuations highlights the continued disconnect between underlying fundamentals of UK real estate and current market sentiment, where discounts to NAV and capital outflows point to a clear underappreciation of the opportunity,’ Shepherd-Cross concluded.