Richard Shepherd-Cross, who manages the Custodian Real Estate Investment Trust PLC (LON:CREI) has much to be cheerful about.
Custodian currently has 140 properties spread across the UK from Edinburgh to Plymouth and Shepherd-Cross is optimistic for the prospects for UK property.
The trust has a regionally–based property portfolio not exposed to high levels of Brexit risks, is diversified and conservatively financed, he told Proactive.
The portfolio is weighted towards industrial and logistics with the balance split between, office, retail and retail warehousing.
Structural issues in the market make the outlook favourable for UK provincial property, even with the uncertainty of a possible rise in interest rates.
“The market is being driven by a total lack of supply.”
Commercial property outside of London has emerged from an eight year recession, he explains, and as a consequence very little new property was built.
Rents have started to pick up but in many areas are yet to recover to a level where developers are prepared to build speculatively, so the demand/supply imbalance remains.
Tenants are now enquiring early about renewals, he adds and that’s largely because there are few alternatives.
For a property investor that’s an attractive scenario and one that is reflected in the impressive performance of the trust since it listed in 2014.
Originally part of the Mattioli Woods stable and still managed by Custodian Capital, a subsidiary of Mattioli Woods, Custodian has seen the value of the company rise to £425mln currently from £80mln.
Shepherd-Cross adds the trust has a predominately retail investor base and what they want are secure dividends.
Property and Income
“Our shareholders like property and want income.”
And he is equally clear that institutional benchmarks are of little relevance to his shareholders.
Retail investors don’t worry about things like discount to net assets, he says.
Rental income and the ability to cover the dividend are the key metrics.
“The right questions [for retail investors] are what properties am I investing in, what’s the dividend yield, what’s the level of gearing and what’s the chance of paying this dividend or higher next year.
And that is what drives the trust’s small property strategy.
Alongside the rise in the value of the portfolio, the annual dividend payment has grown to 6.45p per share from 5.25p since 2015, which gives a yield currently of 5.5%.
None of Custodian’s peers have matched this consistent growth, says Shepherd-Cross and driving this performance is the focus on sub-£10m, regional, commercial properties.
Custodian specialises on buildings with a value of between £2mln-10mln.
He quips he is often asked by fellow property managers when the trust is going to ‘grow up and start to buy proper-sized properties’.
The answer to that is probably never.
Higher returns for no additional risk
“[Through this strategy] we think we can find greater value and deliver a higher return for taking no additional risk,” he says.
At 116p, Custodian shares trade at premium of 11.5% over the last stated asset value of 103.8p.
To keep the premium within reasonable limits Custodian has made a number of small equity issues over the past year.
A situation where the premium gets so large that shareholders decide they might as well as bank three years of dividends is what the trust is trying to avoid, says Shepherd-Cross.
Which brings him back to the sub-£10m, regional property strategy.
"Others [funds] have a higher risk property strategy or a higher level of gearing”
He points to the yield differential between large (£10m plus) and smaller (sub £10m) properties and says that for no additional risk Custodian can get a higher yield of up to 110 bp (1.1%) more.
“That’s why we can pay a higher dividend.”