Smith & Williamson Investment Management’s Managed Portfolio Service (MPS) has added exposure to the student accommodation market to take advantage of depressed valuations as the UK emerges from the pandemic.
The property sector in the UK was at the forefront of the sell-off last year, with many established funds – particularly in the closed-ended market – seeing heavy selling pressure as the country was locked down.
While the economy has started to unlock in 2021, much of the property sector is still being shunned, with REITs trading on hefty discounts to NAV amid uncertainty about the future for the commercial property market.
However, the indiscriminate sell-off has created opportunities in the property sector, according to James Burns, co-manager of Smith & Williamson Investment Management’s MPS, especially among the specialist operators.
The team has therefore added the Empiric Student Property REIT to its Defensive and Defensive Income models to take advantage of this.
“We’ve been underweight property for much of the crisis, but we are now back at a neutral weight in some portfolios after adding Empiric,” Burns said.
“It is a UK REIT investing in premium student accommodation in prime locations in the UK, and the student accommodation story is backed up by long term structural dynamics.
“If the easing of lockdown restrictions continues, as we believe it will, then this investment will benefit from students returning to university in September of this year. We would then expect the discount to narrow significantly.
“As Empiric is a closed-ended fund, we are able to access the sector without facing the gating issue that some open-ended property funds have been facing.”
The trust’s share price halved during the pandemic, but Burns noted the management was very effective in reducing costs to help offset reduced occupancy rates over the past 12 months.
It was also forced to suspend its dividend to preserve cash, but Burns says there is potential for this to be reinstated.
“We believe dividend payments of around 5% could be reinstated later this year. Empiric has a very successful track record in managing their properties in this niche and growing area, and we are excited to be invested in this fund at this stage of its recovery.”
Empiric will sit alongside the MPS’ existing position in Picton Property Income, a long-standing position across the MPS portfolios, taking total property exposure to around 5% in the Defensive and Defensive Income models.
“Picton is a more mainstream play, but it also looks attractive as the UK economy gets back on its feet,” Burns said.
“Another REIT, Picton gives the portfolios broad exposure to the UK property market as it recovers, and it has the advantage of being nimble within the property space due to its size, so we are very comfortable with that position,” he said.