Ian Cowie: bargains for the brave or funds for fools?

Our columnist examines an area offering high yields. However, over the past year and five years this has, in some cases, come at the cost of lower total returns.

6th June 2024 08:56

by Ian Cowie from interactive investor

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Critics of investment trusts claim that double-digit discounts to net asset values (NAVs) are illusory if nothing happens to lift share prices back into line with NAVs. Now, a £434 million commercial property investment trust, where I reported buying shares here last month, has seen its price jump by 11% in one day on bid speculation.

Some illusions seem to be more powerful than others. The warehouse specialist, Tritax EuroBox Euro Ord (LSE:BOXE. EBOX is the sterling currency version) surged to just short of its annual high when Brookfield Asset Management (NYSE:BAM) confirmed it is considering a bid.

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The Canadian fund manager, which claims to have US $725 billion (£569 billion) under management, said it is in the early stages of assessing a possible cash offer for the entire share capital of EBOX. However, that £434 million stock market capitalisation remains -26% below this investment trust’s NAV - which is in line with the average for its sector. So, I believe there might be further to go for both EBOX and other undervalued commercial property investment trusts.

Either way, shareholders are being paid to be patient with dividend income of 7.2%. Not that we should have to wait too long before news, one way or another, because BAM is now required by takeover rules to either announce a firm intention to make an offer for EBOX or admit that it does not intend to make an offer before close of business on 1 July.

Here and now, bid activity adds urgency to considering income and growth opportunities in the heavily discounted commercial property sectors of Britain and Continental Europe. Whatever cynics may say about the lack of catalysts for recovery, you can still buy £1 worth of many warehouses, office blocks or shopping malls for less than 75p or less.

For example, even greater dividend yields and discounts - of 9.1% and -39% respectively - can be obtained from Schroder European Real Estate Inv Trust (LSE:SERE). This £199 million investment trust owns a variety of commercial properties in Paris, Berlin, Hamburg and Frankfurt.

Sad to say, the price of a higher income has been lower total returns because SERE has shrunk shareholders’ capital by -12% and -20% over the last five-year and one-year periods respectively. For comparison, EBOX’s total returns over the same periods are -12% and plus 13% respectively. Neither of these Continental European property trusts has a decade-long record.

Decent dividends with higher total returns and deeply discounted prices can be found closer to home in UK Commercial Property. For example, abrdn Property Income Trust (LSE:API) currently yields 7.6% income but remains priced -31% below its NAV, despite leading its sector over the last year with a total return of 9.2%.

API’s five and 10-year track record offers a partial explanation by illustrating the cyclical volatility of this sector. Over the shorter period, its total return is -23% while, over the longer term, it is positive by the same amount.

Balanced Commercial Property (LSE:BCPT) ranks second over the last year after similar switchbacks over the long, medium and short terms. Is a current dividend yield of 6.6% sufficient to justify total returns over the last decade, five years and one-year periods of plus 6.4%, minus 14% and plus 6.6%? BCPT’s -26% share price discount to NAV suggests that for many folk the answer is “no”.

Part of the problem with API and BCPT is that neither has consistently delivered rising dividends. Both have shrunk shareholders’ income over the last five years; by annual averages of -3.4% and -3.3% respectively.

More positively, real estate income trust Alternative Income REIT Ord (LSE:AIRE) currently yields 8.8% income, despite raising dividends by an annual average of more than 13% over the last five years. It is important to beware that dividends are not guaranteed, because they can be cut or cancelled without notice, but if that rate of ascent is sustained it would double shareholders’ income in less than five years and six months.

AIRE’s 18 underlying properties are spread across diverse sectors including “automotive and petroleum, education, healthcare, hotels and industrials”. Its total return over the last year is a modest 5.5%, but it also remained positive over the last five years with a total return of 22% although it lacks a 10-year record. Its discount is -16.5%.

All the above investment trusts have survived setbacks for this sector - ranging from rising interest rates and online shopping to Covid collapsing demand for offices and technology boosting working from home. Commercial property investment trusts have demonstrated that closed-end funds are a much better way to gain exposure to illiquid assets than their open-ended rivals, which former Bank of England governor Mark Carney memorably described as being “built on a lie”.

Looking forward, it remains to be seen whether the dividend yields and discounts currently available in this sector will prove to be bargains for the brave...or funds for fools.

Ian Cowie is a freelance contributor and not a direct employee of interactive investor.

Ian Cowie is a shareholder in Tritax Eurobox (EBOX) as part of a globally diversified portfolio of investment trusts and other shares.

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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