Please note that tax, investment, pension and ISA rules can change and the information and any views contained in this article may now be inaccurate.
Want to play the vibrant UK property market? Here’s a new way
The latest Halifax house price index data (7 Jun) showed a UK property market still in runaway form.
This might be good news for the value of your own home, but it will also make it more difficult for many to get on the property ladder – meaning more demand for rental properties.
In investment terms the options for people looking to put money to work directly in the residential property market are limited. This is more so since the change to the buy-to-let regime which have made the process more taxing, both literally and in terms of the amount of paperwork a landlord must fill in.
A lot of the current stock market listed vehicles offering exposure to the private rental sector focus on new and high-end developments or specialise in areas like social housing or assisted living.
However, one investment trust hoping to join the UK stock market on 16 July is an exception. UK Residential REIT focuses on existing buildings outside London, and it is also focused on mid-market tenants.
Kee Gan, chief investment officer of the trust’s manager L1 Capital UK Property Advisors, tells Shares that an archetypal asset is a 60-year-old shoe factory in Leicester which has been converted into apartments.
Gan explains the underlying building is ‘well maintained and high quality’ but by repainting and uplifting furniture it has been possible to charge rent at £800 per calendar month from a tenant roster which includes doctors, nurses, students and people working in technology.
This reflects a strategy which is about, in Gan’s words, ‘taking existing buildings, reconditioning, repurposing them and achieving an uplift in rent’.
The seed portfolio, which has previously been managed privately, and the avoidance of any from-scratch developments means the investment trust will be generating income from the word go.
There is a £440m pipeline of investment opportunities and the trust is targeting a dividend yield of 5.5% from 1 July 2022 and a net total shareholder return of 10% a year. Until the targeted funds of £150 million are deployed the trust plans to pay a minimum of 4p per share.
Gan is confident of deploying the new cash from the listing within 12 months thanks to its existing relationships with vendors.
So how does this stack up against other investment opportunities already on the UK stock market? Grainger (GRI) has some similarities in terms of a focus on quality rental properties aimed at professionals. However, unlike UK Residential REIT, Grainger doesn’t have REIT status, a legacy of holding regulated tenancies which was an obstacle to achieving this position.
The tax status of REITs mean they are the closest thing to replicating the experience of holding property directly for investors with 90% of rental income paid out in dividends.
On balance, the launch of an investment trust like UK Residential REIT is well timed given renewed interest in the UK property market, and the ongoing search for yield means it could attract income-hungry individuals. But like any such opportunity, it’s worth reading the small print before making an investment.