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Questor: this property fund is worth holding despite the rise of tenants who want rent cuts

Manchester, City Tower
Schroder Reit's largest holding is a 25pc stake in the City Tower in Manchester

Questor investment trust bargain: Schroder Reit has a great record and its managers have taken steps to limit the damage from renters who agitate for better deals

The commercial property sector faces tough challenges – Brexit-related uncertainty and rising numbers of tenants who want to cut their rent bills – but are they severe enough to justify double-digit discounts among real estate investment trusts?

The pain of Britain’s exit from the EU has been around for what seems like forever. But property investors are having to pay more attention to tenants’ increasing willingness to use the threat of bankruptcy to force landlords to cut their rents.

This activism on the part of tenants, usually retailers, often entails the use of a Company Voluntary Arrangement (CVA), which involves asking landlords to accept a lower rent as an alternative to the tenant’s insolvency. There have been several high-profile cases recently, culminating in the success last week of Sir Philip Green’s Arcadia group in negotiating a better deal with its landlords. But some think CVAs are being used too aggressively.

“They are being used by companies further from bankruptcy than was originally intended,” said Caspar Rock, the chief investment officer of Cazenove, the wealth manager. “CVAs are a threat to everyone in the property sector.”

Before you give property trusts a wide berth, however, there are two points to bear in mind: the large discounts that have opened up in many cases and the fact that not all are equally at risk from CVAs.

Mr Rock has put some of his clients’ money in the Schroder Reit. He said the fund had an excellent record and its discount of about 20pc was wide by historical standards, while it had reduced its exposure to retail property.

He said property fund managers “have to be careful with the mix of tenants and with their creditworthiness” but added: “Schroder Reit has high-quality managers in Duncan Owen and Nick Montgomery and they have done a good job of managing the quality of the trust’s tenants.” Cazenove is owned by Schroders but its fund choices are made independently.

Like many property funds, Schroder Reit has an attractive yield, currently 4.7pc. But in view of the threat that CVAs will lead to rent cuts, it’s important that a property trust’s dividend is well covered by its income. Schroder Reit is one of the stronger funds in this respect, Mr Rock said. He added: “There has to be a possibility that the capital value of its properties will fall. But it’s already at a big discount, which should give investors something of a cushion.”

In view of the tough backdrop for property it’s hard for this column to make an unqualified “buy” recommendation. Instead, we suggest that readers who want exposure to property own the fund as part of a diversified portfolio. Existing shareholders should certainly stay put.

Questor says: hold

Ticker: SREI

Share price at close: 54.6p

Update: Hipgnosis Songs Fund

We tipped this trust, which invests in music rights, in January after a conversation with Caspar Rock. He said it remained part of his clients’ portfolios.

“The fund is continuing to do what it said it would do,” he said. “There was a real acceleration in its purchases of rights earlier this year and by March it had invested all the money raised at flotation, so it raised more from shareholders.”

He added: “It doesn’t feel as if there has been any diminution in the quality of the artists or any increase in the prices it is paying.”

Among the fund’s recent purchases are a catalogue from Sam Hollander, who has co-written songs for the likes of One Direction, Katy Perry, Weezer and Olly Murs.

Questor says: hold

Ticker: SONG

Share price at close: 104p

Update: Alpha Real

This trust, first tipped here in September 2017 at 123.5p, has announced that it will buy back up to 25pc of its shares via a “tender” offer at 175p. Nick Greenwood of Miton, who put us on to the trust, said he would not be selling any of his shares.

“We’ll stay put as we are bullish about the trust’s remaining assets,” he said.

Questor advises readers to hold and sees no reason to take part in the tender offer.

Questor says: hold

Ticker: ARTL

Share price at close: 172p

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