Are you an investor considering including property shares in your portfolio? Or perhaps you already hold property stocks amidst the current unfavorable market conditions?
Understanding Market Conditions for Property Stocks
It is a well-established fact, universally understood by investors, that greater rewards can only be achieved by assuming higher levels of risk. However, at the present time, it seems like investors who are willing to take on higher risk—by diversifying their investments across various stocks—are not receiving equivalent rewards. This is largely due to the rising interest rates and sluggish economic growth, which are fostering negative market sentiment and consequently pushing share prices down.
Regardless of the present circumstances, it is imperative to consider that risk-taking investors are typically well-rewarded in the long run. History gives us numerous examples of difficult periods—characterised by above-target inflation, spiralling interest rates, and lackluster growth—eventually making way for conditions far more favourable for bullish sentiment and increasing share prices.
Analysing Questor’s Strategy Amid Downcast Performance
As a result of this proven trend, The Telegraph’s Questor plans to weather the disappointing performance of the commercial property stocks in its Income Portfolio. The goal being to capitalise on the potential benefits of an eventual long-term recovery.
To give this some context, Questor’s seven property investment trusts have taken an average 23% fall since their notional purchase. Among these is the Urban Logistics REIT, which—since its addition to the portfolio in April 2020—has seen a drop of 17%. However, a closer look reveals an 18% return in dividends, providing a somewhat modest total return.
Spotlight on Urban Logistics REIT’s Long-term Potential
Urban Logistics REIT merits particular attention due to its significant potential for long-term recovery. The trust, which specialises in the ownership of “last mile” logistics warehouses, is constrained by a limited availability of suitable locations—as well as competing demands from residential development. This scenario led to a 20% weighted average increase during two rent reviews settled in the second quarter.
On top of that, the trust also managed to secure four new lettings and sold two assets at an average premium of 3.4% above their March 2023 valuation forecasts. Further improving their financial position, the floating-rate borrowings were refinance with more stable fixed-rate debt. As of now, a substantial 93% of its borrowings are either hedged or fixed.
Financial Robustness Amid Economic Instabilities
At present, the debt constitutes 29% of gross assets, effectively lower than the target range of 30%-40%. Coupled with the earliest debt maturity date scheduled for August 2025, and the average maturity of its borrowings standing at six years, the trust is in a strong position to withstand the impact of the current high interest rates.
Should the Bank Rate fall, there is potential for a revitalised economy and higher valuations for commercial property. This could rectify the Urban Logistics REIT’s deeply discounted price-to-book ratio of 0.7.
Investing in the Midst of Potential Future Uncertainty
Despite the inherent risk in the warehousing sector, the company’s sound financial position allows it to be flexible in the midst of further declines in commercial property prices, enabling it to acquire attractive assets should opportunities arise.
Though the most recent financial year saw dividends held at 7.6p, the company’s yield of 7.1% endorses its income appeal. This, coupled with a sound financial position, a low valuation, and the ongoing supply-demand imbalance in logistics assets, supports the attractiveness of its risk/reward tradeoff. For now, the verdict for Urban Logistics is to ‘hold’.
A Closer Look at Regional REIT
Similarly, for Regional REIT, the poorest performing property investment trust in the portfolio, the suggestion is also to hold. Since its hypothetical purchase in October 2016, the share price has seen a sharp decline of 74%. Even when dividends amounting to 49% of the purchase price are considered, the total return remains in a negative territory, at -25%.
Issues persist with the Regional REIT as it faced a continuing fall in occupancy, down 1.3% from last year. Moreover, a declining portfolio worth and rising debt are further challenges the trust is grappling with. Its valuation, however, coupled with a substantial dividend yield, does suggest that many of its issues are already factored into the price.
Final Thoughts: Holding onto Property Stocks?
Despite the current struggles these trusts face, it is important to consider the longer-term picture, including improving economic conditions and the potential for a stronger operating environment. Though risks persist, the outlook suggests that property stocks in your portfolio may still hold their ground.
Whether you choose to hold onto these stocks or make other investment decisions, understanding the broader environment and individual performance of your holdings is key. Remember, all investments carry risk and it is crucial to make informed choices that align with your financial goals and risk tolerance.