Income generating property shares could be ripe for recovery

Anybody who has invested in income generating property shares will identify with comments made by Chris Turner at the end of 2007.

Not in my lifetime have we seen an asset bubble deflate so quickly and so devastatingly for many investors who had staked their livelihoods and pensions on the safety of income generating shares invested in bricks and mortar.

These shares in many cases are standing at a fraction of their values several years ago as these income generating property shares have had their loan covenants tested and in many cases breached by the dramatic fall in property asset valuations.

However, in the last couple of months stability has returned to some of the lower geared income generating property shares suggesting that the time to once again look at these shares as a way of generating a healthy income through a robust dividend stream may well be right.

I particularly like some of the PITs or Property Income Trusts. These shares predated the more heavily regulated and larger REITs sector and some which over geared have seen share prices savaged and dividend income obliterated. However, there are some which were conservatively geared have continued to pay very health dividends approaching 10%. With an expectation that asset prices are finally stabilising it could be a good time to go in search of some income generating bargains.

My favourites and ones which I all have a personal shareholding in are:

F&C Commercial Property Trust

Launched 2005
Total assets £964m
Gearing 23.8%
Largest three properties St Christopher’s Place Estate, central London; Newbury Retail Park, Newbury; and Cassini House, central London
Sector breakdown 44% offices, 25% retail, 20% retail warehouse, 10% industrial, 1% shopping centre
Chairman Peter Niven, former chief executive of Lloyds TSB Group’s offshore banking operations (Data as at 30 eptember 2008)

ING Real Estate Income Trust

Launched 2005
Total assets £434m
Gearing 47.2%
Largest three properties Unit 5320, Magna Park, Lutterworth; Units A-F3 and G2, River Way Industrial Estate, Harlow; and Phase II Parc Tawe, Swansea
Sector breakdown 48% offices, 29% industrial, 12% retail, 7% retail warehousing and 4% leisure
Chairman Nicholas Thompson, former head of fund and investment management at Prupim and present director of the Lend Lease Retail Partnership (Data as at 31 December 2008)

Standard Life Property Income Trust

Launched 2003
Total assets £167.5m
Gearing 38.9%
Largest three properties Hollywood Green, London; Clough Road, Hull; and Ocean Trade Centre, Aberdeen
Sector breakdown 35% industrial, 30% offices, 22% retail and 13% others
Chairman Sir David Christopher Moore is an advocate of the Royal Court of Guernsey (Data as at 31 December 2008)

UK Commercial Property Trust

Launched 2006
Total assets £643m
Gearing 0%
Largest properties The Parade, Swindon; 5/7 Chancery Lane, City of London; and Great Lodge Retail Park, Tunbridge Wells
Sector breakdown 52% offices, 10% shopping centres, 9% retail, 11% retail warehouses, 18% industrial
Chairman Christopher Hill is chairman of Close Fund Management Portfolios II and Investec Capital Accumulator Trust (Data as at 30 September 2008)

I have been particularly impressed by companies like ING which have despite being quite heavily geared managed to sell property in a difficult market to enable them from breaching their covenants and still return quickly to paying a dividend demonstrating their commitment to the goal of sustainable income generation. Most recently the shares which currently trade at a little over 43p have an asset value of 49p in July. The company has restarted paying a quarterly dividend of 1p which puts the shares on a yield of 9.3%. After a strong recent run up in price from 30p I would look to pick them up at around 40p or a 10% yield.

There are still attendant risks of buying any property income share at the current time. The risk is now not so much about asset price falls but a squeeze on the income generating ability of the companies as occupiers fail to pay rents and voids rates increase. On the upside if inflation does take hold then property, particularly highly geared property is the perfect hedge.