Both funds are managed by F&C. The combination of assets to create the £130 million F&C UK Real Estate would ‘enhance liquidity in the shares’ and increase their appeal for wholesale buyers.
The combined trust would offer a dividend yield 30% lower than IRP and 20% lower than IPT as the board adjusted to reduced rental income however.
‘The UK wealth management sector is undergoing significant change, which is resulting in the creation of wealth management firms with significantly greater scale,’ said IRB chair Quentin Spicer.
‘This has consequent implications for the liquidity requirements for investments made on behalf of clients. The merger of IPT and IRP creates a larger and more liquid investment company which is a natural response to this trend.’
Both funds have suffered due to a limited market for their shares, with IRP currently trading at a 28% discount and ISIS at a 16% discount.
'It has been obvious for a long time (and especially following the 2007-2009 property crash) that these two companies should merge,' noted Dexion analyst Tom Skinner.
'Both are managed by Ian McBryde at F&C REIT, with similar portfolios and similar capital structures. However, the asset values of both had shrunk to levels at which they were too small to be relevant to a lot of investors.'
Adding additional scale will only answer one cause of investor reluctance to buy in, however. Last November Winterflood named the pair as the most likely to cut their dividends due to low capital returns and limited potential for capital growth.
‘Dividend cover remains an issue for a number of funds, and we would highlight IRP Property Investments and ISIS Property Trusts as the most likely contenders to have to cut dividends,’ 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.’