In January, Custodian Property Income Reit plc and Abrdn Property Income Trust Ltd agreed an all-share merger, and then in February, Tritax Big Box Reit plc said UK Commercial Property Reit Ltd had agreed to an all-share takeover.
In its report, Rics said that tenant demand also reflects this bifurcated market: “Tenant demand is becoming more split across location. In London, office demand significantly increased this quarter while elsewhere in the UK the picture is either flat or slightly negative.
"Retail demand is also showing stronger momentum in London than other parts of the UK. Industrial property demand remains steady, with most regions reporting positive demand sentiment."
This is still a market where it is important to tread carefully. Where property companies have debt, they will need to refinance at considerably higher rates when that debt expires. ‘Problem’ debt is rising in the sector and this is another reason to stick firmly to the higher quality end of the market.
The TR Property Investment Trust has been relatively stable in a tough commercial property market. Its net asset value growth over the past year is 21.6 per cent and it remains at a 3.73 per cent discount to NAV. It also has some exposure to Europe, which has helped diversify its portfolio.
If investors are tempted to dip a toe back in UK commercial property, it may be worth balancing UK exposure with other types of commercial property exposure.
Time Commercial Long Income, for example, aims to provide a secure and stable investment return by buying commercial freehold ground rents and commercial freehold property (known as long income property), which benefit from long leases. It has shown its credentials as a diversifier.
Europe has already started on its rate-cutting cycle. As such, European exposure can be useful.
Cohen & Steers European Real Estate Securities invests in a portfolio of European-listed Reits. Its top holdings include German real estate group Vonovia and shopping mall group Klépierre.
Manager Leonard Geiger is optimistic: “An end to central bank tightening tends to be followed by notable strength in listed real estate. In addition, cash flows generally remain sound, and we anticipate healthy earnings growth in 2024.”
CT European Real Estate Securities is another option.
Infrastructure can be less cyclical than commercial property and First Sentier Global Listed Infrastructure would be our main pick there.
The sector is not out of the woods yet, but there are signs that it is starting to stabilise.
The commercial property sector should be a source of steady, inflation-adjusted income and stable capital growth, but it has been through an unusual period. Hopefully, this is about to come to an end.
