Trusts still the best option on the table - here's why

No structure is perfect, however, a positive about trusts is offering more liquidity, says our expert.

Against a backdrop of Brexit and Covid-19, property was the second worst performing asset class globally in quarter one.  

The last few months have reminded us that when it comes to property, whether it’s funds or trusts, no structure has all the answers. But investment trusts are still the best option on the table – just don’t assume that their structural advantages always apply across the board.

Dzmitry Lipski, Head of Investment Research, interactive investor, writes:

A lot has been said about the retail and hospitality sectors being badly hit by the suspension of sporting events and other mass gatherings, and the enforced temporary closures of pubs, restaurants and theatres to limit the spread of coronavirus.

That’s not to mention empty office space – as talk intensifies about what life might look like on the other side of lockdown, it’s hard to imagine what work life might look like in the future.

"As well as our social, emotional and economic lives, all this has spelled bad news for landlords and property companies who rely on businesses to pay the rent on time, and the funds and trusts that invest in them. 

The crisis has already resulted in a raft of open-ended property fund suspensions over property valuations - and investment trusts have not been immune either, with discounts having widened to levels seen during the global financial crisis. 

The unprecedented coronavirus crisis has also put a strain on some property investment trusts that pay a high dividend.

Despite the clear investment trust structural advantages we often hear about when it comes to being able to squirrel away income for a rainy day, those trusts with impressive revenue reserves built over many years that have been able to increase their dividend each year for decades – the ‘dividend heroes’ – tend to be outside the world of alternatives. 

BMO Commercial Property Trust (LSE:BCPT), which has been on our Super 60 rated list as an Alternatives property income recommendation since January 2019, is a case in point.

On 16 April 2020 it suspended future dividends until conditions improve and was trading on a discount of 39% at 30 April 2020.

It’s been wider in recent times, too, and was on a discount of around 60% in late March. 

Despite high share price volatility, the trust recorded only 3.9% negative NAV return in Q1 and its finances are not an area of concern.

It has approximately £20 million of available cash and an undrawn revolving credit facility of £50 million.

Its long-term debt with L&G and loan facility with Barclays do not need to be refinanced until December 2024 and June 2021 respectively. As of 31 March 2020, the trust’s LTV was 22.6%.

Trusts that invest in equities have so far held the line on dividends better than property trusts. None of our rated equity income trusts have suspended dividends to date. 

Wider discounts are expected for property trusts in times of market stress. As for dividends, more broadly this crisis has shown that companies’ dividend cuts are increasingly a necessary short term move to preserve capital rather than a cause for concern.

No structure is perfect, but the closed-ended structure of investment trusts is far superior when it comes to investing in illiquid assets such as property because they offer greater liquidity - if investors want to get out, they can.

Trusts can also remain fully invested because they do not have to hold cash to meet redemptions, and so can take a long-term view – although any gearing will hurt when markets are falling.

But recent events are a reminder that no structure is perfect – especially not in this environment. It’s hard to imagine what life will look like in a month’s time at the moment, let alone in a few years’ time. So it is important that we don’t panic, and that goes for our investments too.