A growing number of buy-to-let landlords have been moving towards commercial property following recent regulatory and tax changes that have made investing in residential buy-to-lets less attractive. The characteristics of commercial property are, however, different to residential property. For starters, investments in retail and office property generally require greater amounts of capital and specific technical expertise.

Commercial properties are also regarded as higher-risk investments, due to typically higher average vacancy rates, which can make it difficult for ordinary investors to rely on a single property investment for income. Instead, most investors would probably be better off pooling their money with other investors, via a property investment trust or a REIT, as this will allow you to benefit from added scale, diversification and the skill of the fund manager in looking after your investments.

Keeping that in mind, here are three commercial property investments that deserve a closer look.

Diversified portfolio

With total assets of nearly £1.5bn, the F&C Commercial Property Trust (LSE: FCPT) is one of the UK’s largest actively managed closed-ended companies investing directly in commercial property.

F&C aims to provide investors with an attractive level of income from a diversified portfolio of prime commercial property assets. The managers invest principally in three commercial property sectors: office — retail and industrial — focusing on investments that they believe will generate a combination of long-term growth in capital and income for shareholders.

The managers have a strong track record of delivering robust returns to its shareholders, after having generated a net asset value (NAV) total return of 82% over the past five years. There’s great income appeal too, with the company paying monthly dividends that currently annualise at 6p per share, giving prospective investors a yield of 4.2%.

Less retail exposure

Looking ahead, it may be a good idea to find a property company with less retail property exposure. With bricks and mortar retailers continuing to cede ground to online sellers, investors are becoming more sceptical towards retail property valuations.

With that in mind, Picton Property Income (LSE: PCTN) may be a better pick. It has just 23% of assets weighted towards retail and leisure, compared to 43% for the F&C Commercial Property Trust. And in place of the company’s lower exposure to retail, Picton is tilted more heavily towards the more resilient industrial and warehousing sector, which accounts for 41% of total assets.

Unsurprisingly, its portfolio construction has served it well of late. The company’s total return for the 12 months to 30 June 2018 was 14.2%, which was roughly double the return achieved by the F&C trust over the same period.

REITs

The REIT space is another good place for investors to look right now, as a number of property giants are trading at big discounts to the value of their underlying assets.

For example, shares in London-focused Derwent London (LSE: DLN) trade at a 21% discount to NAV, for no other reason aside from the weak investor sentiment towards office space in the capital. Analysts reckon the office market in the capital is particularly vulnerable to a ‘no-deal’ Brexit outcome, given the city’s outsized exposure to financial services.

Nonetheless, Derwent London continues to deliver steady earnings growth, with underlying earnings up 14% in the first half of 2018, to 51.8p per share. And on the back of this, the company raised its interim dividend by 10%, to 19.1p per share.

The post Forget buy-to-let! Consider these commercial property investments instead appeared first on The Twelfth Magpie.

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Jack Tang has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Improving outlook

The F&C Commercial Property Trust (LSE: FCPT) reported its half-year performance on Wednesday. The company’s net asset value total return for the six month period to 30 June was 5.1%. The ungeared total return from the property portfolio was 5%. This compares with a total return of 4.6% from the MSCI Investment Property Databank All Quarterly and Monthly Valued Funds.

According to the update, the commercial property market has now readjusted following the EU referendum. Capital values are now above pre-referendum levels, with both capital and rental growth positive throughout the period at the all-property level.

The market has been aided by overseas buying in London, as well as through local authority purchases. Although the general election was major political news, it does not seem to have had a significant impact on demand. While investors remain cautious about the UK economy and the commercial property sector, its overall outlook remains relatively upbeat according to the update.

Inflation-beating potential

Investment trusts such as the F&C Commercial Property Trust and the Schroder Real Estate Investment Trust (LSE: SREI) could help investors to overcome higher inflation. They have dividend yields of around 4% before fees, and this is considerably higher than the current inflation rate of 2.6%.

Both trusts could benefit from improving rental income, with them offering a diversified exposure to a range of UK commercial property assets. And since rents could increase at a faster pace than inflation, there is scope for an already inflation-beating income yield to at least keep pace with the rate of price increases over the medium term.

Risks

Certainly, there is scope for a slowdown within the sector. Consumer confidence may decline due to inflation being ahead of wage growth. This could reduce demand for retail space and lead to reduced upward pressure on rents. Likewise, falling business confidence may hurt office assets in the same way.

However, with interest rates expected to remain low and Brexit negotiations still being in their relatively early stages, confidence among businesses and consumers appears to be more buoyant than many investors had expected. Commercial property remains popular at the present time according to today’s update from F&C, with its income-producing capacity being popular. This situation may remain in place and could lead to a narrowing of discounts or an extension of premiums in the sector. As such, now seems to be a good time to buy the two investment trusts for the long term.LSE:

The post 2 high-yield investment trusts for income investors appeared first on The Twelfth Magpie.

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• How much is needed in an ISA to unlock £1,220 of passive income a year?
• Forget meal deals! Here’s how £8 a day could be worth £357,000
• Up 132% and surging, how is this FTSE 250 share STILL so cheap?

Peter Stephens owns shares in F&C Commercial Property Trust. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. 

Profit from uncertainty

Daejan Holdings (LSE: DJAN) started life as an investor in coffee and rubber plantations in the Dutch East Indies, but these days its activities are restricted to property investing — with approximately 70% of its business in the UK and the remaining 30% in the USA.

And that business seems to be doing fine, as the company has just announced a 10.6% rise in pre-tax profit for the six months to 30 September to £65.1m, with earnings per share up 33% to 376p. Equity holder’s funds per share amounted to £95.58, so the shares are trading at a significant discount to that at £56.30 apiece.

Daejan certainly isn’t an investment without risk. As chairman BSE Freshwater pointed out, it’s still too soon to know the full effects of Brexit on the sector, and the USA is facing “the uncertainty of a new and largely unknown President whose impact on the USA economy and the property sector cannot be foreseen at this stage“.

The firm announced a 35p interim dividend, and a full-year forecast yield of 1.6% doesn’t exactly make this a cash cow for income investors, but the shares do look cheap on fundamentals right now. The price has more than doubled over the past five years, but it’s down 15% since a December 2015 peak — although the sharp dip immediately after the EU referendum rebounded very quickly and there’s been no overall effect from that momentous event.

If first-half results are repeated, we’ll be looking at a full-year P/E multiple of 14-15, and that looks pretty average on the face of it. But with the firm’s property portfolio valuation looking so strong, I’m sure there’s some emotion-led undervaluation there.

Investment trust

An alternative way to get into the property market is via an investment trust. I like investment trusts, as there’s no conflict between earning cash for customers and maximizing profits for shareholders — because they’re one and the same.

F&C Commercial Property Trust (LSE: FCPT) has been paying a solid dividend of 6p per share for several years now, and at the end of 2015 that yielded a healthy 4.5%. The same 6p again this year would provide 4.3% on today’s 138p share price.

One of the advantages of an investment trust, which some other pooled vehicles do not enjoy, is the ability to hold back earnings in strong years to maintain regular income for investors. The last three years of earnings have come in well ahead of dividends, so that cash stream looks safe enough to me.

The shares are on a low P/E of around seven, although asset value is a key metric when it comes to valuing an investment trust. At the halfway stage last year, F&C reported a net asset value per share of 134.1p, so the shares are currently trading at a slight premium to that. But that excess isn’t even enough to cover one year’s dividend, and if earnings remain strong and that dividend payment of 6p per year is kept up, then that would seem like an attractive valuation to me.

The post Will Daejan Holdings plc buck the property trend as profits rise? appeared first on The Twelfth Magpie.

More reading

• The £15bn defence splurge that could send UK shares soaring in July
• Up 446% in 12 months! What’s next for the Ceres Power share price?
• How much is needed in an ISA to unlock £1,220 of passive income a year?
• Forget meal deals! Here’s how £8 a day could be worth £357,000
• Up 132% and surging, how is this FTSE 250 share STILL so cheap?

Alan Oscroft has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.