A Fund managed by Swiss Life Asset Managers UK Limited
A Fund managed by Swiss Life Asset Managers UK Limited
Dear Investors
In view of the current economic situation, we write to provide you with a brief update on the state of the property market and the likely impact on your investment within the Property Income Trust for Charities.
Following the government’s “mini budget” tax cut announcements on Friday 23rd September, the UK now looks set to be on course for prolonged higher interest rates. The 10-year gilt at the time of writing stands at 4% with the prospect of further monetary tightening at the next BOE MPC meeting on 3rd November. At present, markets are pricing in a base rate rise to 4%, and then to 6% in Spring 2023. This is against a backdrop of spiralling inflation which is likely to be remain higher for longer due to the continued devaluation of Sterling (against the dollar) and the war in Ukraine.
Investors in property typically require a premium over and above the cost of ‘risk-free’ debt to compensate them for the additional risk associated with the asset class. Over a thirty-year period, this has typically been around 230 basis points. As things stand today, following the sudden rise in yields on 10-year government debt, the premium sits close to parity with the latest MSCI monthly property yield (31 Aug 2022). In almost all circumstances when this has occurred since 1980 this has triggered a period of outward yield movement and associated capital value loss.
Whilst it is too early to predict the prospects for capital growth over the months ahead, the good news for investors is that the asset class continues to generate an attractive income return, which on a total return basis, will reduce the impact of any negative capital movement. It is this income component which continues to be the most important driver of returns, contributing 74% of total returns over a 36-year period since inception of the MSCI Index. Furthermore, occupational markets remain broadly under supplied and unlike in 2007, overall leverage in the market is relatively low. These two factors should help to mitigate capital value declines.
As suggested within its name and investment objective, the Property Income Trust for Charities has always maintained a strong focus on income. It pays income monthly and currently delivers an attractive distribution yield of 4.3% (based on the August NAV), with close to 100% rents collected across the portfolio in the most recent quarter reflecting the continued strength and quality of its underlying tenants. As at 30th June 2022, 81% of these tenants are rated as “low” or “minimal” risk according to Dun and Bradstreet.
We recognise the detrimental impact that inflation can have on charities’ funding commitments and fundraising activities. A key component of our Fund strategy, therefore, is not just to deliver a relatively high yield, but also to deliver real income growth and so it is pleasing to be able to report a 15% increase in pence per unit distributions over the past 12 months due to a reducing vacancy rate (7.7% at the date of this letter) and value-enhancing letting activity.
Due to its thematic investment strategy, the Fund is invested in those sectors and assets aligned to the secular trends that are expected to have enduring occupier appeal. This follows an active 18-month period which has seen the Fund sell £110m of assets that did not meet our strict investment criteria. The Fund’s largest allocation remains to warehousing (44% of portfolio value), which continues to be structurally undersupplied and where rental growth remains strong. For instance, we recently completed a warehouse letting in Stockport at a 24% increase to the previous passing rent, which included a last-minute upward rent re-negotiation following new letting evidence.
We are also now investing into the residential sector, where rental growth has consistently outperformed inflation over a thirty-year period and where structural undersupply persists. With increasing affordability constraints and rising interest rates, we expect rental demand to remain strong for modern, energy efficient residential property which will support rental growth. At our recently acquired scheme in Colchester, all units were let within seven days of completing the acquisition.
We anticipate that capital values will come under further pressure in coming months however, regardless of economic conditions, PITCH is well positioned to continue to deliver stable, attractive and growing distributions to investors within a diversified property investment portfolio. Furthermore, the Fund is well capitalised (circa £40m in cash at the time of writing net of Q3 redemptions) with no material redemption pressures. As ever, we will manage our cash position responsibly whilst monitoring the market for buying opportunities for the Fund.
We appreciate that the economic picture is changing rapidly but hopefully this provides investors with a helpful update on the property market and PITCH. A further update and portfolio activity summary will be available within the Q3 Factsheet which will be available towards the end of October.
Please do not hesitate to contact myself or James Lloyd (jlloyd@mayfaircapital.co.uk) or one of the PITCH Team pitch-fund.co.uk should you have any immediate queries.
Yours sincerely,
S Martindale
Fund Director
smartindale@mayfaircapital.co.uk
For and on behalf of Mayfair Capital Investment Management Limited