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May 4, 2020

CoStar | Invest in real estate for its yield, but be careful: not all sources of income are secure

This article originally appeared on CoStar on 4 May 2020, written by Roger Clarke, IPSX Managing Director and Head of Capital Markets. 

As the UK’s lockdown continues, there is a misconception that capital markets are dysfunctional and broken amid the coronavirus outbreak. But in April alone, three REITs have raised more than £400m between them by issuing new shares. Why have investors not run off scared? Because these companies reflect continued demand for the right kind of real estate investment.

Supermarket Income REIT, Assura and Big Yellow Group – all of which pushed on with their share placings while most of us were forced to work from home – are focused on particular segments of the market, and their sector-specific strategies gave investors enough confidence that all three of the placements hit (or exceeded) their target.

In the case of Supermarket Income REIT, its occupiers are at the forefront of the crisis, meeting demand brought from people having to rely on supermarkets and eating in. As a result, its pipeline of close to £300m of assets is especially attractive. The market knows exactly what type of investments the £140m it raised will make and has confidence in the strength of the ensuing occupier covenants.

Occupiers not paying their rent is a major concern for some of the UK’s largest landlords. Landsec, for example, reported that just 65% of the rent due on 25 March was paid by 31 March this year, down from 96% in 2019. Meanwhile, Supermarket Income REIT received 100% of its expected quarterly rental payments. In times like this, there are few things as alluring as reliability.

Assura is in a similar position, raising £185m at a 44% premium to NAV and giving it the headroom to invest £250m in new property. Like Supermarket Income REIT’s occupiers, Assura’s GP surgeries play a central role in fighting the crisis, and the placement gives it additional firepower to help meet the needs of those working in healthcare. 

Assura’s acquisition pipeline would have existed even without the crisis – its placement documents talk about “substantial growth momentum” from ongoing development – but the crucial point is that it demonstrates how certain sector-specific investments can weather the storm in ways that highly diversified portfolios might not. As Assura’s chief executive Jonathan Murphy put it: “Our predictable business model demonstrates our resilience in these uncertain times with no change to the current business model.”

In many ways, this confirms what we saw on the London Stock Exchange at the end of March. Most listed companies took a beating, but the ones that suffered least within property were the ones with reliable long income from resilient tenants. Since then, companies like Assura and Supermarket Income REIT have recovered, trading at around the level they did at the start of the year. The biggest diversified REITs, however, are still substantially below where they were in January.

This brings us back to the question of dysfunctionality. Coronavirus is absolutely disrupting the fortunes of many companies and portfolios, but it’s also forcing the market to consider what the right kind of real estate investment is. It reminds us that when economic headwinds arise, transparency and reliability are key.