Niche players offer alternative to norms of listed property

The UK doesn’t yet have anything to compete with the giant specialist US REITs in sectors such as residential and healthcare, but it does have a handful of established and successful listed companies targeting niche property assets: Grainger in residential, UNITE in student housing, Big Yellow, Lok ‘n’ Store and Safestore in self-storage, and Primary Health Properties, MedicX and Assura Group in healthcare.

“The attraction of the companies lies in the fact that they expose investors to different aspects of the economy, such as student accommodation and self-storage, diversifying a portfolio,” says Miranda Coburn, an analyst at Oriel Securities.

“Investors are exposed to asset-backed companies, but with different types of tenancy: self-storage is short-term and all about keeping the occupancy up, while Assura Group, which develops property for primary healthcare, has long leases backed by government-backed income. Healthcare provides a stable return, in contrast to offices, which can show volatile returns.”

Mark Weedon, head of alternative real estate at IPD, adds that the alternative asset market is growing all the time as it changes and matures. “In the past, retail warehouses were classed as alternative assets,” he says. “Now they are a staple of the property market. What investors look for in these stocks is above-average returns and beyond that they are focused on income, capital accumulation and stability. They want long-term returns, not short-term volatility.

“There is a shortage of supply in health-care, which is an essential service with government backing. Demographic factors are fairly strong: we have an ageing population, with a greater need for care homes and specialist treatments. “The demand and supply imbalance is not linked to the performance of the economy and it is underlined by these demographic factors.

A hedge against commercial property

Weedon continues: “These companies also act as a hedge position to the rest of an investor’s portfolio, because if you have invested in commercial property and the economy takes a downturn, you will take a hit. These companies balance out that risk.”

Colette Ord, a director of investment companies research at broker Numis,  says: “One attraction of listed healthcare landlords is the visibility of the income they earn by virtue of their long leases. “Primary Health Properties and Assura own long leases on GPs’ surgeries. About 90% comes from the GPs and they in turn are reimbursed by the Government.

It’s a strong covenant and they also don’t see voids. Because of the strength of the income there’s not a lot of volatility.” She also cites these companies’ attractive dividend yield, noting that Primary Health is around the 6% level (although it is not yet fully covered), and the fact that rent reviews on the assets they own tend to be linked to the retail price index.

”This year two new alternative asset specialists came to the market for the first time, launching IPOs. The first was Target Healthcare REIT, formed in January and listed on the Stock Exchange’s main market  in March, raising £45.6m of capital, before raising a further £4.6m in June and £45.5m in October. It is chaired by former SWIP property head Malcolm Naish.

Kenneth MacKenzie is managing partner of Target Healthcare’s investment manager, Target Advisers. “We thought the public market was an interesting source of capital for the healthcare sector and we were seeking to raise funds to invest in that sector,” he says. “We are offering a 6% covered dividend, paid quarterly. We raised about £100m, which we are spending on care homes across the country.”

This year’s other alternative assets IPO was by GCP Student Living, launched by infrastructure and property specialist fund manager Gravis Capital Partners as the first student accommodation REIT in the UK (UNITE is not a REIT).  Listed on the Stock Exchange in May, and paying quarterly dividends, the company is targeting a 5.5% annualised income yield, growing in line with inflation, and a total return of between 8% and 10%.

“This target will be achieved by investing in modern, purpose-built private student accommodation and teaching facilities in London, which will be branded under the Scape Student Living banner whenever possible,” the company says. GCP is seeking to take advantage of a shortage of purpose-built student accommodation in London, and in particular, from the increasing demand from interna-tional students studying in the capital.

Alternative asset stocks in demand

Both flotations were well received and investor demand for alternative asset  companies looks set to continue to increase, especially in the areas of healthcare and student accommodation. “Looking to the future, we will see more flexibility and more opportunistic investors moving into the market quite quickly,” says Weedon. “All the companies are trying to expand and will be doing more of what they do well.

“Some people believe the best way to get something done properly is to build it yourself. They will develop assets, and quoted companies are bigger risk takers, so they will move into that area.” Numis’s Ord believes recent NHS reforms have acted as a restraint on the market, but now that the majority of them have been enacted, following the implementation of the Health and Social Care Act in April, new developments will be able to move ahead more quickly.

“The underlying market will start to pick up as attention shifts to improvements in doctors’ surgeries,” she says. “It’s a great sector, with a lot of attractive characteristics.  Most of the uncertainty is gone now. There will be many more opportunities to invest and companies will continue to grow.”