UK Commercial Property Trust, the £1.4bn real estate trust advised by Standard Life Investments, has received shareholder approval for a REIT conversion it says will benefit shareholders in light of government tax changes.
The conversion is partly a response to proposed legislative changes regarding commercial gains tax and measures designed to tackle base erosion and profit sharing, or BEPS, that would make it more advantageous to have a REIT status.
The government is planning to eliminate capital gains tax relief for overseas buyers of UK commercial property. It is also planning to change the rules on how offshore vehicles are taxed, reducing the tax deductibility of debt.
Will Fulton, fund manager at Standard Life Investments, who manages the trust, said he hoped the conversion would also make the fund more visible to some investor groups.
The company’s REIT status will come into effect on 1 July 2018, when its name will be changed to UK Commercial Property REIT.
£1.4bn portfolio
UKCPT has a £1.4bn portfolio and focuses on assets generating sustainable income returns. Some 36% of its portfolio is now in the industrial sector; 33% is in retail; 20% is in offices and 11% is in alternatives.
Fulton said the trust was “reaping the benefits” of his decision in 2015 to tilt the portfolio away from retail and increase its industrial exposure, which is concentrated in the South East and where he said there was still potential for income growth.
He said he was “weary” of retail. “Retail is increasingly polarised, so retail in poor locations I continue to be concerned about and I have been for a number of years,” he said.
He added: “People still want to experience physical shopping. It’s just that where they want to do it is becoming a tighter location.”
Retail assets in “poor locations” it has exited include the three retail centres totalling 428,400 sq ft that it sold to Shropshire council in January for £51m, representing a small premium to book value. Retail it has retained includes Great Lodge Retail Park in Tunbridge Wells, Kent, which Fulton said was an example of an affluent area where planning constraints limit supply and retailers want to be located.
Of its 33% portfolio allocation to retail, 21% is in retail warehousing, where bulky goods such as beds and sofas are sold. Fulton said he thinks these items are “slightly more insulated from online shopping.” Shopping centres account for 4% of UKCPT’s portfolio.
Alternatives
Fulton said the trust had £55m of free capital it is looking to spend. One area of focus is hotels, where Fulton sees opportunities for longer secure-income deals where they don’t compete with annuity funds. UKCPT acquired its first hotel asset last year – the Maldron Hotel in Newcastle – for £32m, a yield of 5.4%.
Another key area of interest is assets where significant infrastructure improvements have been committed.
Since its inception in 2006, UKCPT has, it says, delivered a higher NAV total return, 83.5%, than the peer group weighted average return of 75.7%.
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