Guest column by Frank Buhagiar
Student accommodation, social housing, warehouses, doctors’ surgeries, shopping centres, supermarkets and even big boxes – name a property sub-sector and chances are there is a REIT focused on it. Last week, shares in the Warehouse REIT became the latest to join the swelling ranks of property focused trusts trading on both the London Stock Exchange’s Main Market and Alternative Investment Market after it successfully raised £150 million to acquire a portfolio of UK warehouse assets.
The trust, which has been spun out of logistics and warehouse property company Tilstone, will start its public life with a portfolio of 27 freehold and long leasehold warehouse assets let out to a total of 129 tenants, including blue chip names such as Boots, Amazon, Asda and Argos. It will take these properties off Tilstone’s hands for £108.85 million with the remainder of the funds raised at IPO earmarked to acquire additional warehouses, specifically those located in urban areas.
Warehouse REIT is looking to capitalise on changing consumer shopping habits: more and more of us are buying all manner of items online and what’s more we expect to get our hands on them in double quick time. To avoid disappointing their punters, retailers need space close to urban areas so that they can deliver on their promises. The problem is that there is a lack of suitable space and properties. More established peers such as Tritax, Segro and LondonMetric have largely focused on out of town big box buildings. What sets the new kid on the warehouse block apart, is that it is interested in smaller urban buildings that comprise the so-called “last mile” delivery sector.
The fund will be managed by Tilstone Partners Limited (“TPL”) who, as part of the consideration received for the seed properties, will hold £16m of equity in Warehouse on Admission. These shares are subject to a two year lock-in period. On top of this, members of the Board and management team subscribed for a further £1.8m in shares of the Company on Admission, which will be subject to a one year lock-in. The fund manager’s interests are therefore aligned with those of its investors and they will therefore be as keen as anyone to hit the 10% targeted annual total return, which includes a 5.5% dividend yield.
This level of yield seems to be par for the course for new investment trusts listing this year. Other funds that have joined the market in 2017 and which are also targeting a 5%+ dividend yield include social housing investors Secure Income (RESI) and Triple Point Social Housing REITs (SOHO) which raised £180 million and £200 million respectively; and Supermarket Income REIT (SUPR) which attracted £100 million and is targeting a dividend yield of 5.5%. The above are among 10 investment trusts that have floated in London in H1 2017, a 10-fold increase on the one trust that came to market in the first half of 2016.
As for what is behind this year’s surge in investment trusts coming to market, Ian Sayers, Chief Executive of the Association of Investment Companies, has a theory: “It’s interesting to note that much of the issuance, both new and secondary, took place in high-yielding, alternative asset classes such as debt, property and infrastructure. This reflects the suitability of the closed-ended structure for investing in these types of illiquid assets and continued investor demand for income.” Investors’ search for yield it seems has found yet another outlet in the form of the UK REIT sector. Due to the closed end nature of REITs, when markets wobble fund managers will not be forced into having to make distressed sales to meet redemptions should investors make a dash for the exit, as was the case with a number of open-ended trusts during the financial crisis and the weeks following the BREXIT referendum. In short, there should be no need for any bargain warehouse sales in the REIT sector, or so the theory goes at least.