Page 36 - DIY Investor Magazine - May 2019

WHY SHOULD INVESTORS CONSIDER SPECIALIST REITS?
Investment trusts can be a great way of investing in property, given the relative illiquidity of property as an asset class and the long-term time horizons it entails. That’s why real estate investment trusts (REITs) have flourished since their introduction to the UK market in 2007 – writes Calum Bruce of Ediston Property Investment Company
But not all REITs are equal. Given the opportunities for active asset management that commercial property affords, we believe that specialist REITs can offer considerable attractions over generalist, benchmark- constrained REITs.
Commercial property is a diverse asset class. Accordingly, its component sub-sectors will often diverge widely from each other in their performance and prospects. At any given time, certain areas will languish while others flourish.
But REITs that follow a standard property benchmark will be shackled to the languishing parts of the market rather than focusing on the flourishing ones.
Specialist REITs, on the other hand, have no such constraints. This means that they can focus on the areas where the managers believe valuations are most attractive and prospects are brightest.
This is especially important with UK REITs because of London’s inevitable dominance of benchmark indices. For example, following a standard property benchmark means accepting high exposure to the London office sector.
But this is an area that faces less certain prospects in the run-up to Brexit. Meanwhile, conventional high-street retail also looks unattractive as it wilts in the face of online competition. And while big logistics warehouses have done well in the past, they now look distinctly overvalued.
But rather than simply accept that an allocation must be given to each of these areas, specialist REITs – like Ediston Property (which we manage) – are able to try to avoid them.
‘THE EDISTON PROPERTY REIT CURRENTLY OFFERS AN ATTRACTIVE YIELD, AT 5.4%*’
‘SPECIALIST REITS CAN OFFER CONSIDERABLE ATTRACTIONS OVER GENERALIST, BENCHMARK- CONSTRAINED REITS’
We are a specialist in asset management and don’t subscribe to any property relative return benchmark so we’re free to focus on the areas where we see the greatest potential for sustainable income and steady capital growth.
That’s a huge advantage in such a diverse asset class. We currently focus on the retail-warehousing sub-sector. This is an area that’s actually benefiting from the current shift towards e-commerce. And although we invest in the principal commercial property sectors, we don’t diversify for diversification’s sake. Instead, our focus is always on the potential for individual asset performance.
Another big advantage of specialist REITs is that they tend to be smaller. This allows them to be much more flexible and nimbler when shifting weightings between sub-sectors, because they have fewer properties to buy and sell. So they have a much smaller ‘turning curve’ than their larger peers.
This is important: no asset class stays the same over a given period, and it’s entirely possible that managers will want to shift allocations in anticipation of the changing fortunes of various sub-sectors. A large, REIT can be unwieldy and struggle to do this within an appropriate timeframe. In contrast, their smaller, specialist counterparts can be better equipped to reflect the evolving market environment.
But perhaps the most important advantage of specialist REITs is, in our view, in asset management.
Specialists like Ediston are small enough to engage in the active management of every asset in the portfolios which we manage. We choose investments because they’re good, but we specialise in making them great.
DIY Investor Magazine | May 2019 36