UK regional Reit sees limited downside from Brexit vote – so far

AEW UK REIT plc, the London-listed closed ended fund invested in UK regional property, has said that outcome of the UK referendum vote to leave the EU has not hit the sector as feared, with resilience seen in valuations and tennancy levels.

Announcing its quarterly unaudited net asset value (NAV) and interim dividend for the period ended 31 July 2016, the first of a number of similar real estate investment trusts focused on UK property to report its numbers, AEW portfolio manager Alex Short added that while “early days” still post-referendum, he remains “encouraged”.

“While valuers continue to caveat heavily their assessments, AEW UK REIT is the first of its immediate peer group to announce a NAV that covers some of the post referendum period and the minimal reduction of 1.81% over this period is testament to the resilient and diversified nature of the portfolio, as well as the success of its ongoing asset management initiatives.”

“There continues to be increasing tenant demand, particularly for business space assets in strategic regional locations and regional cities across the UK, as they increasingly become location choices away from London for established financial and professional services and technology, media and telecoms businesses. This, coupled with an acute shortage of good quality supply, which is leading to rental price uplifts, gives confidence and provides assurance in AEW UK’s current investment strategy.”

“With the expectation that Central London property valuations may prove to be more volatile in current market conditions, the outlook for commercial property returns in strong UK regional locations remains positive for the foreseeable future. AEW UK REIT’s low level of gearing and the strength of its covenants gives us confidence that, by continuing to focus on income producing assets, it can continue to deliver on its stated dividend policy across the portfolio and generate market-leading total returns to shareholders.”

That said, there remains uncertainty as to the degree of a Brexit impact were Reit investors to put their properties on the market, given the lower liquidity seen in the market since the referendum, according to AEW’s statement referencing the opinions of its independent valuer Knight Frank.

“Following the EU referendum result, and in common with other independent valuers, Knight Frank has stated that there is still a shortage of comparable evidence of arm’s length transactions since the Referendum.  Knight Frank have, therefore, had to exercise a greater degree of judgement than would be applied under more liquid market conditions.  The probability of their opinion of value exactly coinciding with the price achieved, were there to be a sale, has reduced,” AEW’s latest quarterly update notes.

Concerns over liquidity have also caused a shift in the pricing mechanism of the AEW Core Property Fund.

“Following a modest demand for liquidity from some investors in the Core Fund, its independent Governance Committee, sub Pricing Committee has recommended the manager moves the fund’s swinging single price from offer to bid and also applies a further dilution levy of 5%.”

“The company’s auditors, KPMG, advise that this price should be used to value the company’s holding in the Core Fund, which is 6.4% below the current NAV of the Core Fund as at 31 July 2016.  The value of the REIT’s Core Fund interest is now 14.4% below its value as at 30 April 2016 despite the underlying fall in value of the property held by the Core Fund being only 2.6% down.  This has the effect of reducing the company’s overall NAV by 1.3%.  It is anticipated that the Core Fund pricing will swing back as markets stabilise and the dilution levy will be removed.”

Investors in AEW’s Lodon-listed shares will receive a 2p dividend for the period 1 May to 31 July, which will be paid 30 September. This has been proposed even though actual earnings over the period were reported as 1.98p. The Board expects the dividend payment to be met from property income of existing assets.

Jonathan Boyd
Editorial Director of Open Door Media Publishing Ltd, and Editor of InvestmentEurope. Jonathan has over two decades of media experience in Japan, Australia, Canada and the UK. Over the past 17 years he has been based in London writing about funds and investments. From editing the newsletter of the Swedish Chamber of Commerce in Japan in the 1990s he now focuses on Nordic markets for InvestmentEurope. Jonathan was awarded Editor of the Year at the Professional Publishers Association (PPA) Independent Publisher Awards 2017. Shortlisted for the same in 2016, he was also shortlisted in 2017 and 2015 for the broader PPA Awards category Editor of the Year (Business Media).

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