Huge discounts on property investment trusts could create attractive buying opportunities for investors looking for a cheap and liquid way into the commercial property sector.
According to Financial Express and Trustnet figures, there are huge bargins to be had on many trusts in the sector with the average discount of 33.4%.
The largest discount is on the Invesco Property Inc Trust standing at 72.6% although this has been driven by banking covernance issues faced by the company at present which make it higher risk.
However, the second highest discount is on the ING UK Real Estate Inc trust at 47.7% with the Invista Foundation Property trust standing at 46.00%.
A trust is said to be trading at a discount if the share price of an investment company is lower than the net asset value (NAV) per share. An investor buying into a company with a large discount would benefit by gaining a share for a bargain price when considering the value of the underlying assets.
Martin Wood, senior research analyst at Financial Express, says the widening discounts on property trusts have been a trend for some months.
“Since July this year there has been quite a dramatic move on discounts in the property sector. One of the reasons for this is investor sentiment. This started to be seen at the beginning of the equity market volatility in May 2006 when there was a scramble for alternative assets such as property. This led to inflated values for property but there is a slowdown to come.”
Wood says investors should take the opportunity to have a look at property trusts now before valuations start to fall even further.
Daniel Lockyer, fund manager at iimia which runs a fund of investment trusts, says the discounts on property trusts do make the vehicles appealing although he urges caution.
“When these property trusts were launched 2-3 years ago they were very popular, with some of them trading on a 10% premium.
“People are look at property trusts now which are yielding 8% with a discount of 40% and asking in the long term will they be a good opportunity or a value trap? It is important to assess the property market and ask will there be falls in property value and is this reflected in the discount?
“It is difficult knowing when the right time is to buy. However, one of the reasons we like trusts compared to open-ended vehicles is the discounts which means if the NAV falls further this is built into the price."
Lockyer says another reason he likes property investment trusts is the fact they are more stable then their open-ended counterparts as the manager does not have to make sales to satisfy redemptions.
This is a key consideration at the moment as some companies such as Friends Provident have announced notice periods on redemptions for their institutional open-ended property vehicles.
Lockyer is currently backing the Invista Foundation Property trust which he says has a good portfolio of prime assets, many of which are London-based.
0207 034 2637
‘Most significant’ upgrade since launch
Changes happening over coming months
Had accepted British Steel business
Aimed at HNW clients and family groups
Set for 1 April 2019