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We uncover four exciting smaller companies which offer income and upside

For most people, the attraction of investing in real estate investments trusts, or REITs for short, is that they offer a stable and consistent stream of income.

They are also a good way of getting exposure to real assets which in theory should behave differently to stocks and bonds, and provide some diversity in a portfolio.

The permanent capital structure and closed-end nature of investment trusts is much better suited to holding less liquid, long-term real assets like property than open-ended funds, as the last couple of years have demonstrated only too clearly.

However, many investors stick with big FTSE 100 real estate companies like Land Securities (LAND) and Segro (SGRO).

We have uncovered four real estate investment trust which are geared to commercial property, mostly in the industrial space, which are actively managed, and which offer attractive yields as well as scope for further increases in net asset value.

Three invest exclusively in UK property, while the fourth invests solely in continental Europe, adding an extra layer of diversification.

Three also trade at a discount to their net asset value, and all offer an attractive and sustainable yield which is becoming ever more important with inflation eating away at returns.


Price: 106p   NAV: 109p   Assets: £212 million

AEW manages a varied portfolio of 35 properties, mostly in the Midlands and North West, made up of mainly of industrial buildings ranging from 25,000 square feet to 280,000 square feet and in age from the 1960s to 2010.

It also manages eight retail sites, including several along the south coast, five office buildings, a leisure park and a cinema, both in Essex.

In the six months to the end of September, the company increased its net asset value by 11% and the value of its portfolio rose by 9.8% on a like for like basis.

During the half, the firm sold an industrial asset in Kirby for £10.8 million, almost double the purchase price and above its latest book value, and last month it sold a warehouse in Basingstoke for £5.86 million, 70% more than it paid and again above book value, demonstrating management’s ability to add value.

The proceeds were recycled into two new properties in Bristol and Shrewsbury with initial net yields of 8% and 8.7% respectively, and earlier this month the managers bought a retail park in Coventry for
£16.4 million while still keeping a cash balance of just over £15 million.

Rent collection is excellent and the average vacancy rate across the portfolio is just over 5%. The company pays an 8p per share dividend, which at today’s price equates to a yield of 7.5%, ticking the box for investors wanting a healthy income stream.

Ediston Property Investment Company (EPIC

Price: 79p   NAV: 89p   Assets: £300 million

Ediston started as a UK generalist REIT, but over the last five years it has been shifting into out of town retail parks and warehouses to take advantage of the increasing popularity of home delivery and click and collect services.

At present around quarter of the portfolio is still office space but talks to sell these assets are ‘at an advanced stage’ according to manager Calum Bruce.

Meanwhile, rent collection has held up well and contracted revenues at its retail sites are almost back to pre-pandemic levels.

During the last quarter, the company sold a site in Prestatyn occupied by supermarket group Tesco (TSCO) for £26.5 million, or a yield of just 5.2%, and reinvested most of the proceeds in a retail park in Stirling for an impressive 9.5% initial yield.

Moreover, once the two vacant units on the Stirling site are overhauled and let, the initial yield will rise to 10.8%, more than doubling the return on investment. This ability to unlock value in under-appreciated assets is key to generating superior long-term returns.

The current dividend of 5p per share puts the company on a yield of 6.3%, but Bruce is confident investors will see payouts rise as the asset mix improves with the sale of the office properties.

Industrials REIT (MLI)

Price: 184p   NAV: 147p (from 30 Mar ‘21)   Assets: £533 million

If the company’s name seems unfamiliar it is because up until September it was known as Stenprop, but it still focuses on owning UK urban multi-let industrial property.

Manager Paul Arenson calls the trust ‘the home of SME’s’ (small and medium enterprises), given its customer base and the size of its units which range from just 500 square feet to 10,000 square feet.

Multi-let units are in strong demand as they are affordable and located on the edge of towns offering easy access for online retail and logistics firms to their target markets.

‘Almost every quarter we see new businesses evolving’, says Arenson. Among the most recent tenants are the new breed of super-fast delivery firms such as Getir and Gorillas, for whom affordability and accessibility are key.

Demand is also being driven by firms stockpiling more goods on a ‘just in case’ basis instead of ‘just in time’ order to avoid supply chain shortages.

Shortage of supply means rents are growing well above inflation, with the firm posting a fourth successive quarter of over 20% increases in average rents at renewal or on re-letting between July and September.

With leasing enquiries up around 50% this year the firm is busy adding new multi-let estates to its portfolio, underpinning its 10% target total shareholder return.

Schroder European Real Estate (SERE)

Price: 104p   NAV: 125p   Assets: £224 million

Like the UK-focused trusts, the company focuses on attractive, income-generating commercial property assets with the potential for capital growth.

Unlike the bigger and better-known trusts like Aberdeen Standard European Logistics Income (ASLI), which trades at an 8% premium to NAV (net asset value), and Tritax Eurobox (EBOX) which trades at an 11% premium, the shares are sitting at a discount of almost 17% to NAV.

The portfolio consists of 13 properties located in and around what manager Jeff O’Dwyer calls ‘winning cities’ like Paris and Berlin, which are globally-facing financial and technology hubs with good infrastructure which in turn attracts higher-value industries and creates positive employment trends and a ‘wealth effect’.

In late 2020 the company sold its biggest asset, the Clarity office block in Paris, for €104 million. The existing tenant, French software firm Alten, signed a new 10-year lease, which together with the agreed refurbishment helped secure an exit price of almost three times the 2016 purchase price.

O’Dwyer also has plans for another of the trust’s key assets, a Hornbach DIY store in Berlin which together with the car park sits on four hectares of prime real estate ripe for residential development.

With its sizeable discount, a 6% dividend yield, €50 million of investable cash and a clear vision of how to maximise the value of the portfolio, this trust looks like one to lock away for the long term.

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