Trust launch may indicate commercial property market is “fertile ground”

Special Opportunities REIT is in the process of launching an initial public offering on the London Stock Exchange. It aims to raise a total of £500mn from investors, with three “cornerstone investors” already committed to buying the shares, these include Golden Tree Asset Management, TR Property, and the Bhavnani family office. 

Alan Ray, investment trust analyst at Kepler Partners said: “If investors wait until the first rate cut before thinking about a recovery in real estate valuations then they could well find themselves scrambling to catch up, and so from a timing perspective this IPO looks well thought out, as property valuations are still bumping along the bottom, or in some cases even falling. Clearly, as a new trust, there will be a ‘ramp up’ period between launch and full investment, meaning a little patience will be required, but that’s almost the point, as there is potentially a very fertile hunting ground over the next 6 to 12 months for a real estate investor with cash resources.”

He said if the trust raises its target amount then it will have the advantage of being a buyer of assets in a market where most others are sellers. 

James Carthew, head of investment trusts at Quoted Data, said that launching a commercial property fund in the current climate is a “contrarian idea” but said he is pleased that the investors “seem to have got some traction” with this idea. 

Carthew said: “ Valuations have already come down a long way and picking up bargains from forced sellers should allow them to lock in decent returns. If they can add additional value through asset management initiatives then the double digit returns that they are aiming for may be achievable. They seem confident of deploying the money raised relatively quickly, which means that the target yield should be deliverable too.”

Commenting more generally on the outlook for the commercial property sector, Emma Bird, head of investment trust research at Winterflood securities said: “You can sense the pent-up demand on the sidelines. In November last year, share prices spiked when UK ten-year gilt yields fell by 39 basis points as hopes of peak rates were supported by better-than-expected inflation prints, and rates were kept on hold by both the Fed and Bank of England.

“On that news, the UK Commercial Property sector rebounded, with the FTSE EPRA NAREIT UK Index returning 12.6 per cent – the best absolute monthly return, and the best relative performance vs the FTSE All Share, since August 2009. While that bounce has since unwound, it suggests that there is a notable amount of capital waiting to re-enter the property sector once the macro outlook becomes clearer.”

Darius McDermott, investment adviser to the VT Chelsea range of multi-manager funds said that higher interest rates have had a negative impact on the returns achievable from commercial property in the coming years, while the current travails of the investment trust sector as a whole has also dented sentiment towards REITs.