The investment trust sector has seen huge price moves over the last couple of weeks, exacerbated by increased volatility in stock markets. The sector trades at an average 15% discount to net asset values (NAV), a level only seen at the depths of the financial crisis in 2008.
As stock markets have recovered this week, we have seen some wild moves in the prices of some trusts and some discounts have narrowed appreciably.
Going in the other direction were Fair Oaks Income (FAIR) off 13.6% and Empiric Student Property (ESP), down 8.9%. Fair Oaks Income is now trading at a 48.9% discount to NAV, compared to a historical average discount of 5.5%, according to data from Winterflood.
As more people are forced to work from home, possibly for an extended period of time, the digital transformation has gathered pace and raised questions around the need for large corporate office spaces.
Commercial property funds have been severely de-rated over the last few weeks as investors worry about the sustainability of rental income and falling asset values.
The UK commercial property sector has moved from a 0.6% premium to NAV to a discount of 26% as of last night’s close. However the discount is based on out-of-date asset values and Winterflood expects ‘some, if not all, funds to announce decreases in portfolio valuations when their 31 March NAVs are published.’
Furthermore, published portfolio valuations will probably include a material uncertainty statement, to reflect economic conditions caused by the coronavirus pandemic.
PLENTY OF DEBT HEADROOM
A key concern for investors is the amount of debt that property funds hold, as there are usually limits placed on debts as they relate to the value of the portfolio, so called loan-to-value ratios (LTV), with most in the 50% to 60% range.
However, the vast majority of funds have much lower debts today than compared with the financial crisis of 2008 and would therefore need to see dramatic falls in the value of their assets to breach the limits. For example, the average LTV for UK commercial property funds is currently just 26%.
DIVIDEND CUTS TO COME
Another potential worry is the ability to pay dividends as many tenants are likely to be asking their landlords for rent-free periods during the current economic environment.
According to trade magazine Retail Gazette, Primark owner AB Foods (ABF) 'has withheld its quarterly rent in a bid to force landlords to consider revising terms urgently.' The move affects 110 Primark stores where rent payments were due yesterday.
Wnterflood believes this may well lead to some temporary suspensions and maybe longer-term cuts.
The average dividend yield for the sector is 8.6% which is 101% covered. But Winterflood argues that dividend cuts are likely already priced in and reflected in the current deep discounts to NAV.