Set against a backdrop of low government bond yields and corporate bond spreads narrowing to pre-covid levels, Philip Matthews, co-manager of TB Wise Multi-Asset Income fund, says commercial property is an attractive hunting ground for income.
With the 10-year government bond in the US and UK yielding 1.4% and 0.9% respectively, Matthews said the search for sustainable yield in global asset markets remains challenging and is pushing investors further up the risk curve.
“The question now is whether there remain any areas to invest where yields remain attractive, economic recovery is not yet fully reflected in valuations, and which provide some protection in the event inflation proves less transitory than expected,” he said. “One sector that fulfils these three criteria is property.”
For investors, Matthews said the outlook for commercial property will depend on the extent underlying occupancy returns to normal, or whether covid has permanently changed what “normal” will resemble.
“Will previous structural tailwinds, such as an ageing population for the care home sector, reassert themselves or will the disruption from covid prove more protracted?” he said.
Balanced rent book
In this environment, Matthews said that in the TB Wise Multi-Asset Income fund, he is finding a diverse set of opportunities within the commercial property sector to invest.
“Ediston Property, an investment trust predominantly exposed to retail parks, currently yields 6.7%,” he said. “However, we believe the dividends have ample opportunity to grow from here, as tenants return to paying rent that was foregone during the crisis.
“Similarly, the Standard Life Investment Property Income Trust, yielding 5.1% and on a discount [to net asset value] of 19%, looks attractive.”
Offering more direct inflation protection, Matthews added, is the Impact Healthcare Reit. With a portfolio constituting of 109 care homes, occupancy trends improving, and rents having inflation linkage built in, he said an initial yield of 5.5% looks “compelling”.
For Matthews, closed-ended funds offer an appropriate way to invest in the property sector as they avoid the “liquidity mismatch” of open-ended funds.
“There remain excellent opportunities to gain more cyclical exposure where recovery is not being priced in as well exposure to more defensive areas,” he said. “Initial yields are high and have scope to grow either through the indexation of rents or as rental income grows from pandemic troughs.”
