Investing in alternatives: property and Tritax
Michael Costa, Alternatives Research Analyst, Fidelity Multi Asset
Income investors have usually seen property as a reliable income source, offering a stable income stream and the potential for some capital growth. The second half of 2016 therefore may have come as a shock to some. UK REITs sold off following the EU referendum, falling by just under 10%. For investors in direct property funds the picture was not much better, with many funds suspending redemptions or imposing sharp discounts to discourage investors from selling.
While some may therefore question the merits of property investing, there are still select opportunities. Within our multi asset income portfolios, we invest in REITs on an opportunistic basis, rather than having a fixed asset class weighting. We consider property to be part of our alternatives exposure, with certain vehicles able to provide strong diversification benefits relative to equities or bonds.
Look behind the asset class label
Tritax is one UK REIT which we believe is attractive for income investors. The current yield is around 3-3.5%, relatively high for a good quality REIT like Tritax. It rents out distribution warehouses to UK retailers outside the M25, with a weighted average lease term of 16.3 years and a diversified customer base including Amazon, L’Oreal and Tesco.
The growth of online shopping in the UK also helps to support the investment case for Tritax. This structural growth should mean Tritax performs well even if retail sales fall, while companies are unlikely to cut spending on distribution networks even in a recession. Although property can have some correlation to the economic cycle, Tritax’s characteristics should therefore offer some resilience against this.
The case for Tritax has been further emphasised by its post-Brexit performance (chart below). While it did suffer an initial sell-off, this was less pronounced than for the MSCI UK REITs index and it was back at its pre-referendum close within a month. In contrast, UK REITs are still down by around 10% from their June 23rd close.
Source: Datastream, Fidelity International, February 2017
What are the risks?
As with any investment, Tritax does of course come with risks. Tenants can go bankrupt for example, which could cause lease breaks or temporary vacancies. Risks around vacancies are reduced, however, by the long lease terms, which can’t be exited without some kind of penalty. As well as having a diverse tenancy base, Tritax also focus on desirable, high quality assets which are always likely to be in demand.
While the investment proposition behind an alternatives vehicle is important, we also look to ensure that the management have the experience and ability to add value for investors and will not act too aggressively. Moreover, Tritax remains a small part of our alternatives exposure, at just under 0.5% of the Fidelity Multi Asset Income Fund and one of several dozen alternatives vehicles.