A second quarter of property price increases at Custodian Property Income (CREI ) proves the real estate market has finally bottomed out, says manager Richard Shepherd-Cross.

A quarterly update for the three months to the end of December from the real estate investment trust showed the value of its portfolio of smaller regional industrial, office and retail assets had stabilised.

The value of the 151 properties ticked up 0.5% to £586.4m over the quarter, marking the second quarter of increases after two flat quarters.

Shepherd-Cross said the result was ‘further evidence the market has bottomed out’ and the valuation increase ‘adds further support to our belief we are at the start of a gradual upwards trend’.

Property valuations still have some way to go to match the pace of rental growth of more than 5% a year over the past 18 months.

In the last three months of 2024, the fund enjoyed a 0.9% increase in like-for-like passing rent and an increase in like-for-like estimated rental value (ERV) of 0.6%, driven primarily by industrial rents, which were up 1% over the quarter.

‘We completed 25-plus lettings, lease renewals, regears and rent reviews during the quarter at significant average premiums to ERV and previous rent, as well as continuing to make disposals on terms ahead of valuation,’ said Shepherd-Cross.

Custodian added that there is ‘significant potential’ for further rent growth given the ERV of £49.5m exceeds the current passing rent of £44.5m by 11%. About 35% of the reversion is available from leasing events, but the majority will come from letting vacant space.

Increased rents delivered over the quarter means the 1.5p quarterly dividend is fully covered by earnings, and Shepherd-Cross said future earnings should allow the fund to continue its ‘longstanding track record of fully covering our dividend, which now offers investors an attractive 8% yield’.

The high yield comes despite a rally in the shares over the past year – up 15% versus a 9.4% total return on the underlying portfolio net asset value (NAV). This rally is yet to offset a tough few years, however, with the NAV up just 3.6% over three years and shareholders still down 14% over the same period.

This is reflected in the 19% discount the shares trade at as the market values the fund at just £336m.

Shepherd-Cross said the listed property sector is ‘yet to deliver the forecast recovery despite recent positive indicators in the direct property market’.

‘Notwithstanding discernible rental growth and the clear identification of an inflection point in direct investment markets, economic gloom and high 10-year gilt rates are acting as a brake on the listed sector,’ he said.

That said, he believes there are ‘reasons to be cheerful’, not least the forecasts for stronger returns this year. And given the sharp correction due to rising interest rates, Shepherd-Cross believes ‘it would take a significant shock to knock the recovery off course’ today.

‘It is our strong contention that, with the benefit of hindsight in three to five years’ time, 2025 is unlikely to be viewed as a poor entry point into UK real estate,’ he said.