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Property investing: ‘reliable’ income over ‘unreliable’ yield

7 October 2020

Matthew Norris, head of Real Estate Securities at Gravis is warning against seemingly high yielding companies that are in fact struggling as the Coronavirus continues to affect the viability fo investments on the property market. 

Norris, who also is manager of the VT Gravis UK Listed Property Fund (GULP), cites the example of shopping centre owner Intu. In the summer of 2018 Intu, at the time the largest shopping centre owner in Britain, declared its interim dividend for 2018 – on an annualised basis, the REIT was trading on a superficially attractive yield of 6.5%.

However, Norris adds, this dividend turned out to be unsustainable. The 2018 dividend was Intu’s last ever payment and two years later all value for shareholders was erased when the company entered administration.

This example reinforces the potential danger of chasing dividend yield stocks Norris says.

“Over the past decade investors who bought the highest yielding quintile of UK real estate companies and rebalanced this theoretical portfolio semi-annually would have underperformed a portfolio of the lowest yielding REITs. This proprietary research highlights how it can be in the best long-term interests of investors to avoid the highest yielding stocks and instead focus on those REITs that offer both yield and sustainable growth.

“Over the fullness of time, real estate exposed to the favourable socio-economic mega trends shaping the country (e.g. ageing population, digitalisation and generation rent) should remain in high demand by rent paying tenants. On this basis it is reasonable to assume that specialist REITs owning high quality real estate, including those that have temporarily suspended dividends in response to the business effects of the coronavirus, are likely to resume dividend growth strategies as the economy recovers.

“Dividends will continue to play an important part in shareholder returns. However, given the risks associated with the highest yielding REITs, Noris says the fund would continue not to chase yield, instead “maintaining an investment preference for reliable income not unreliable yield”.

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