Saturday 8 June 2013

Portfolio Buy: Standard Life Investments Property Income Trust (LSE:SLI)

The search for yield is harder today than for many years and anything yielding more than around 5-6% will have its own specific risks. After selling some chunks of fully-price fixed-income securities, I need to find somewhere to put the cash to work - but without losing money, if possible.

The problem is that most fixed-income is heading south and equity markets are yo-yo-ing in reaction to comments on the potential end of QE by various governments around the world.

Is it time for commercial property?

This particular Channel Islands-based property trust is currently yielding a juicy 8%, after a dramatic fall in the price - which implies that the market is seriously worried about some aspects of its operations.

The first danger sign is that the dividend cover is very slim - and 1.2, forecast to fall below 1.0, which would imply that more dividend was being paid than income received. The risk of a dividend cut is therefore high, although there is no indication that this is planned.

The activities of the trust are described succinctly by Trustnet:

"The fund aims to provide long term growth from a combination of income and capital growth by investing predominantly in prime quality UK properties. Typically the fund will invest in a mix of freehold and leasehold properties selected from across the retail, office, industrial and other sectors. The fund may also invest in European properties and in property development opportunities. As well as direct investments, the fund may also invest indirectly in property through investment vehicles such as quoted and unquoted property companies or collective investment schemes."

Indeed at the end of the year, 20% of the fund was held in other investment schemes and a further 15% in the money markets.

The Final Results published in April 2013 were fairly reassuring, with the banking facilities having been successfully renegotiated. The NAV fell by nearly 10% over the year but a continued emphasis on income was reasserted:

"While our focus was, and will continue to be, on the receipt and distribution of income, I am alert that we should also deliver an attractive total return and growth in our NAV. However, the measurement of capital value is lead by the market at large as much as by our own assets and is far more subjective than the actual receipt of cash from tenants."

The property investment strategy is also being modified:

"We are looking to enhance the portfolio of properties so that it is entirely let to tenants of substantial financial covenant at fair rents that have the potential to grow as the UK economy recovers. Our belief is that well positioned good secondary properties are more likely to deliver the future returns that we seek rather than the pursuit of heavily priced so-called prime opportunities."

Over one-third of the portfolio was invested in office space.

Voids are the bane of property investment: these were high over the year, although related to refurbishment: however some 3.6% of the portfolio remained without a potential client.

One potential silver lining is a maturing swap facility:

"A swap facility of £72m will mature in December 2013, and as a consequence our NAV will be enhanced by £3.2m (2.3p per share)."

So, all-in-all the biggest risk seems to be a cut in the dividend. I'm hoping that even if this happens, the yield will still be reasonably attractive. More importantly, I'm hoping that commercial property will benefit from the apparent recovery that seems to be under way in the UK.

[Purchase price: £0.5674]

I am not a financial adviser and the information provided does not constitute financial advice. You should always do your own research on top of what you learn here to ensure that it's right for your specific circumstances.


  1. I think (hope?) that this will be a clever buy. Having been a holder for a few years, I have been adding of late & have a meaty proportion of my funds in SLI.

    Valuers have been knocking properties with shorter leases which is why SLI has suffered, & the Chairman has had a moan about this. However, my reading of the strategy is to see leases with a shorter period to expiry as a plus rather than a minus: not so much as a risk to income as an opportunity to 'asset manage' by refurbishment trade on as a development opportunity or relet on better terms.

    Debt is under control, it feels right to me


  2. I recently bought into this trust too. However, I got it much cheaper at only 56p a share!

    1. Whoops - decimal point misplaced! Now corrected!

  3. Hi DIY,

    Is this fund type same as a typical Investment Trust ?


  4. Hi DIY,

    Is this trust same type as an Investment Trust ?


  5. time of investrment is not determined by every one..