UK property funds could see a series of dividend cuts as returns get harder to come by.
Only one closed-end fund, F&C Commercial Property Trust, was able to grow its net asset value (NAV) in the latest round of trust updates. Capital returns, as measured by the IPD Monthly Property Index, have been on the slide for 11 consecutive months.
Although this remains a far cry from the 25 straight months of capital decline when the sector was in the doldrums between 2007 and 2009, it still reflects weak fundamentals. Property investment companies have also seen their first dividend cut in three years.
Winterflood Securities’ investment companies team, headed by Simon Elliott, pointed out that with such limited scope to grow income, the dividend cover of some property funds could also come under pressure.
‘Dividend cover remains an issue for a number of funds, and we would highlight IRP Property Investments and Isis Property Trust as the most likely contenders to have to cut dividends in the near future,’ the team said.
‘Although both have cover of around 75%, there appears little scope to grow income. Consequently, cover is more likely to fall in the near-term than grow.’
According to its latest shareholder update, the £730 million F&C Commercial Property Trust has for its third quarter delivered the sector’s best NAV performance, benefiting from making disposals at significant premia.
But even its manager, Richard Kirby, highlighted only marginal growth in rental income as tenants are reluctant to commit to long leases given the current economic uncertainty.
Kirby also lamented the ‘subdued’ returns seen in commercial property more broadly. ‘The property market outlook in the short term will continue to be affected by the slow pace of economic growth both in the UK and overseas, problems in the eurozone and the restructuring of the banking system,’ he said.
These headwinds translated into a narrow 0.1% rise in NAV during September, versus the 1.4% total return made on the portfolio over the six months ended in June.
The pressures facing the sector are also evident elsewhere, with the first dividend cut since 2009 being announced by Picton Property Income in September.
While £180 million Picton’s decision to reduce its shareholder payout from 1p to 0.75p per share chimed with its desire only to award dividends supported by earnings, the trust’s portfolio has suffered in recent months as its industrial and rest of UK office exposure caused a drag.
Picton’s NAV performance fell from 60p to 52p, as at 30 September, and on a quarterly basis its NAV is down 3.7%.