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Property Presenting Performance Potential

Investors looking for some positive potential in this current UK market turmoil could do well to consider Real Estate Investment Trusts (REITs), within specific sectors, which are offering some compelling opportunities.

Despite the difficulties facing the UK economy, we are seeing four fundamental demographic and technological trends within the property sector: ageing population, urbanisation, 'generation rent' and digitalisation. With the maelstrom of mispricing, REITs benefitting from these trends are in a strong position to benefit from and may offer opportunities for the long term.

In particular, property across key sectors is presenting investors with opportunities to benefit from valuation gaps, especially within REITs.

The divergence between the continued strong property leasing fundamentals and the share price performance of REITs has created a significant valuation gap. UK REITs are trading at a discount to published net asset value (NAV) of approximately 38%1.

The size of this valuation gap is a rare, but not unique, occurrence. During the past decade, there have been a number of occasions when REITs have traded at a 20%, or greater, discount to NAV.2 Most of these discounts occurred in periods of ‘black swan’ events, such as extreme political uncertainty (e.g. during the Brexit referendum) or a sharp economic slowdown (e.g. during Covid-19 pandemic).

In the 12 months following these occurrences, REITs generated an average total return of approximately 20% and, in many cases, returned to trading at a premium to NAV2.

However, NAV discounts should not be viewed as an indiscriminate buy signal – security selection remains key, with REITs benefiting from the socio-economic trends mentioned above: ageing population and urbanisation, being strong performers.

For the former, Impact Healthcare REIT, which offers investors exposure to a diversified portfolio of UK healthcare real estate assets, in particular as the owner of high-quality care homes across the UK, is benefiting from the demographic tailwind of an ageing population. The company reported a 3.3% increase in NAV per share over the first half of the year, with management issuing positive guidance stating that, “we are well placed to deliver our 9% per annum medium term total accounting return target3.”

Impact recently sold non-core Attlee Care Home (68 beds in Wakefield) for £2.65 million, 4% above the latest book value as at 30 June 20224.

In August, the group exchanged contracts to acquire two care homes in Kent for £14 million, plus acquisition costs, for a new tenant, Belmont Healthcare. The transactions are expected to enable the Group to deploy an initial £14 million of capital, plus transaction costs, followed by additional asset management and development opportunities; the initial annual rent has been agreed at £890,000, reflecting an accretive gross initial yield of 6.36%.

These acquisitions will be leased on Impact’s standard green leases, with fixed terms of 25 years and annual upward-only rent reviews linked to the Retail Price Index (RPI), with a floor of 2% per annum and a cap of 4% per annum, with commitments to a minimum annual expenditure by the tenant on the maintenance of the care homes5.