Income investors will have a new high-yielding real estate investment trust (Reit) to add to their watch lists next month as South African property company Stenprop lists in London offering exposure to the UK’s undervalued ‘multi-let’ industrial sector.
Stenprop (STPJ.J), which spun off from South African financial services group Stenham four years ago to list on the Johannesburg and Bermuda stock exchanges, is dropping the Caribbean tax haven in favour of London, where it believes its shares – with a forecast yield between 5.5% and 8% – will fetch a higher valuation.
Shares in Stenprop are currently thinly traded and as a result stand over 20% below their net asset value (NAV) of £1.35 per share, according to the company’s founder and chief executive Paul Arenson.
It is hoped that the move to London and the conversion to a Reit, which happened on 1 May, will attract new investors, narrow the discount and re-rate the shares as the company sells down a valuable European portfolio to focus on UK multi-let industrial properties, where Arenson sees a ‘fantastic opporunity’.
He describes multi-let as the lowest tier of industrial property, below the white-hot ‘big box’ distribution centres leased by Amazon, and the medium-sized ‘single-let’ warehouses used by retailers.
This is the unglamorous end of the sector where industrial estates of small units cater for a growing army of start-ups unleased by the Internet revolution. Although City institutions avoid the sector as too awkward to manage, Arenson (pictured) said it possessed strong fundamentals given the lack of new supply combined with growing demand from businesses.
‘I’ve been in property for 25 years in the UK, Switzerland and Germany in all sorts of asset classes. It’s very seldom you find an asset class that is so pregnant with value,’ said Arensen.
‘People assume it’s all mucky manufacturing but the shift to the Internet and e-commerce has spawned an enormous number of occupiers for these units,’ he explained.
For landlords prepared to offer flexible three-five year leases and support services to small and medium-sized enterprises, good returns were available, he added.
Stenprop ventured into the sector last year buying a £127 million portfolio from Morgan Stanley. In the nine months since the acquisition, estimated rental values had risen 10%, according to the company’s marketing documents.
When fully let, the 30-strong portfolio of 779 units should generate nearly £12.5 million in rent. Although the vacancy rate is currently high at just over 15%, Arenson said this was due to the redevelopment of Coningsby Park in Peterborough, which it bought cheaply from Thomas Cook, the travel agency.
So excited was Stenprop by what it saw it also bought C2 Capital, the management team that ran the portfolio for the US investment bank. C2’s founder Julian Carey, who has spent a career in multi-let properties, is now spearheading Stenprop’s investments in the UK. The sale of £460 million of its low-yielding properties in London, Germany and Switzerland would provide £220 million to buy more multi-let properties over two years with the remainder used to pay down group debts and strengthen the balance sheet.
The London listing gives Stenprop, an existing fund, an advantage over M7 Multi-Let which tried but failed to float on the London Stock Exchange last year. The company is not seeking to raise new money, nor are its existing investors selling out, although there are no restrictions and Arenson expected its current backers to gradually sell down if the discount narrowed.
With a ready source of funds from property disposals, he said Stenprop could be in a strong buying position.
Meanwhile, its depressed stock offers a yield of 7.8%, second only to AEW UK Reit (AEWU) in the UK commercial property sector which yields just over 8%. Should Stenprop’s shares rise to match the NAV the yield would drop to 5.5%, still above the sector average of 4.6%, according to corporate broker Numis Securities.