Fund spotlight: BMO Commercial Property Trust

by Dzmitry Lipski from interactive investor |

interactive investor's analysts give an update and view on the BMO Commercial Property Trust.

The Brexit vote in 2016 created high levels of uncertainty around the UK property market and, as a result, investor redemptions from property funds have risen significantly.

Due to concerns about lower property valuations, some property fund managers suspended trading in their funds.

Although the previously suspended funds have reopened, these changes may prompt fund houses to reconsider whether a daily priced fund structure is most appropriate for illiquid underlying assets.

Despite these challenges, the long-term fundamental argument for property as an asset class remains intact and investors are cautiously optimistic about the outlook for the UK property market, with income protection a major consideration. 

As we approach the Brexit deadline on 31 October, investors anticipate a period of relative weakness for property. However, its income return, and continued interest from overseas buyers taking advantage of the sterling weakness, should provide some level of support. Yields and valuations remain attractive relative to other asset classes, and property remains a solid option for income seeking investors and for diversification purposes. 

The fund

BMO Commercial Property Trust (LSE:BCPT) is the largest within the direct property investment trust sector with total assets of £1.4 billion. It has been managed by highly experienced property investor, Richard Kirby, since its launch in March 2005, who is supported by the wider, well-resourced team at BMO Real Estate Partners. 

The trust aims to provide an attractive level of income together with the potential for growth in both capital and income from investing in a diversified UK commercial property portfolio. The manager's focus is on high-quality freehold and predominantly long leasehold properties based in prime locations with developed infrastructure and transport links, and with an ability to generate a stable level of rental income with some capital appreciation. 

The trust primarily invests in three commercial property sectors with the maximum weightings: office – 50%, retail – 65% and industrial – 40%. It also has an exposure to the alternative sector, including leisure, residential property and student housing. No single property may exceed 15% of the portfolio, and the five largest properties may not exceed 40% of total assets. Short leasehold properties (with less than 60 years remaining) may not exceed 10%. The manager also spreads risk by investing across different geographical areas and sectors and by letting properties to lower risk tenants. 

The trust has an integrated environmental, social and governance (ESG) approach where they scrutinise property assets as well as tenants to ensure they are not engaged in any unethical activities. They also produce an annual Responsible Property Investment (RPI) report which discusses their RPI strategies and priorities as well as ESG performance data for the year.

What's in it?

The trust offers a diversified exposure by region and sector with a bias toward properties in the West End of London. Its largest assets include St Christopher's Place Estate, an office building in St James's Street in London, and retail park space in Newbury and Solihull.

The portfolio is made up of 37 properties, with 36% is in London's West End, a further 21.6% in the South East, 12.6% in Scotland, 12% to Midlands and 12% to North West. It currently has no exposure to Wales or the North East, with limited exposure to the City of London offices, which could be more vulnerable to Brexit fallout. At sector level, 39.5% of its assets in offices, 18.2% in industrials, 22.4% in retail and 10.6% in retail warehouses.

The portfolio has a high occupancy rate (95%) where an average lease has nearly seven years left on it, which adds some stability to the portfolio yield. 

The trust offers a relatively high yield of 5.4% and has generated an annual dividend (paid monthly) of 6p since 2006.

How does it perform?

The trust has produced consistent returns over the longer term. With some stress on capital values from retail properties, the recent performance has been subdued and primarily driven by income. It is currently trading on a much wider discount than its peers, at -18%. 

A key performance driver for the trust is through its property management channel, including refurbishing individual properties. The manager also uses gearing to enhance returns over the long term, and the current level stands at around 20%.

It is worth noting that, following changes to the cost structure in 2017, the trust is now among the most competitively priced trusts in its sector with no performance fees and ongoing charges of 0.83%.

  01/08/2018 - 31/07/2019 01/08/2017 - 31/07/2018 01/08/2016 - 31/07/2017 01/08/2015 - 31/07/2016 01/08/2014 - 31/07/2015
BMO Commercial Property Trust (LSE:BCPT) -18.41 2.48 25.22 -11.98 26.38
EAA CE Property - Direct UK Sector 4.86 5.57 7.08 1.64 15.62

Source: Morningstar Direct as at 30th June 2019. Returns in GBP

ii view

BMO Commercial Property Trust make sit onto the ii Super 60 list of high-conviction investment ideas as an Alternatives property income recommendation. The trust provides exposure to prime UK commercial property and is managed by one of the most experienced teams, led by Richard Kirby. The trust has produced consistent returns since inception and its yield is attractive for income investors. The low correlation between property and more conventional assets such as equities and bonds mean that the inclusion of a property fund within a portfolio can bring significant diversification benefits. Given property is considered relatively illiquid, this closed end structure is more appropriate than open-ended funds. 

If you enjoyed this article, you may also like other funds picked for interactive investor's Super 60 range of high-conviction investment ideas. Click here to find out more.

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

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