Investment Companies News

Poor sentiment towards the waning commercial property market is causing problems for the F&C Commercial Property trust, forcing it to convene an EGM to weigh up the future for the company.

The EGM has been scheduled for 28 September. It will consider an ordinary resolution to approve the continuation of the company. When the Guernsey-listed company launched in March 2005, the prospectus said that if the market price of the trust was more than 5% below the net asset value for a continuous period of 90 dealing days, shareholders would have the right to vote on continuation.

The trust has suffered from changing sentiment towards the commercial property market. The shares traded on an average premium of 3.8% from launch to 7 September 2007. On 7 September, the shares were trading at a discount of 13.5%, although that was still better than the average discount in the sector of 15.5%.

The managers believe continuation is in the best interests of shareholders. The performance of the trust since inception has been strong. From launch to the end of the last quarter end (30 June), net asset total return per share was 64.7%, compared with a total return on the FTSE All Share of 47.9%.

Over the same period the property portfolio generated a total return of 56.3%, compared with a total return from the IPD Monthly index of 42.7%.

The commercial property market is certainly turning down after three years of exceptionally strong returns. Yield compression has stabilised and capitalisation rates have begun to fall in certain sectors. There is still demand for ‘prime’ property, particularly in central London, but demand is weakening elsewhere.

The trust is largely invested in prime property and is therefore better insulated against the turn in the cycle. That said, in its retail portfolio, rent reviews are taking longer to settle as the market weakens. The office market continues to be the best performing sector, particularly in central London. The industrial property portfolio return is ahead of the IPD index, though pricing may weaken.

A lot of the trust’s properties are subject to rent review, lease renewal and break options this year. Gearing has been reduced from 24.4% at launch to 17.6% now.

The company has bought back 7m shares at an average discount of 9.3% to shore up the share price. It will continue this policy while the share price is at a 5% discount or higher. It is likely to be swimming against the tide until sentiment towards the sector improves.

A clearer idea about the future for interest rates and therefore the future for yields in the sector will soothe property investors’ nerves. As sentiment hits rock bottom, now is certainly not the time to be selling out.