First 50 Funds Interview: Michael Morris, Picton Property Income Trust

16 January 2018
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Moneywise’s Helen Knapman meets Michael Morris, chief executive of Picton Property Income trust – a Moneywise First 50 fund.

What is Picton Property Income?

We invest in commercial property in the UK across different sectors and geographies. Today, the trust has a high weighting in industrial logistics and a low weighting in retail – in five years’ time it might be quite different.

Our business is simple: we own assets and we collect rent from our occupiers, which generates a cash flow – this pays for our operational costs and anything after that is profit, which is distributed as a dividend payment to investors – currently about 4%.

We’re different to most investment trusts and property vehicles in that we’re internally managed – so we don’t pay money to a third-party management fi rm. We have 11 staff, and I’m responsible for what they do – they only work on the trust, so we have a complete alignment of interests.

What do you look for when you’re buying commercial property?

We invest in industrial, office, retail, and leisure. We’re also occupier focused and opportunity led.

Being occupier focused means we can retain our occupiers for longer and have a better cash flow. A good relationship means we’ll know if they’re expanding or contracting and can adjust accordingly.

Being opportunity led means that when we buy a building we think about whether it will be attractive for occupiers, whether it’s future-proofed for the next five or 10 years, and whether we can enhance it. Would we be better off converting an industrial unit into a gym, for example? We did this with one property 18 months ago, enabling us to double the rent.

What’s your favourite type of commercial property?

We like warehouses, industrial units, and logistics units because they generally have good occupancy rates and good rental growth.

What properties have you recently bought and sold?

We buy and sell properties quite infrequently because trading costs for commercial properties are expensive – it could be an 8% cost by the time you factor in stamp duty and fees. In the past six months, we’ve bought one asset and sold two.

We’ve bought an office in Bristol, which was 66% occupied and 34% unoccupied. The opportunity for us here is to find more occupiers quickly and to improve the cash fl ow. It’s also a good building in a location where rents are growing.

The two buildings we sold were offices in Bracknell, Berkshire, which we sold for a higher value for residential use.

What have been your best and worst investment decisions?

The worst was having too much gearing [debt] in 2007 and not foreseeing the scale of asset write-downs that happened in 2008/09. In a rising market, if you have debt you see better underlying performance, but in a falling market if you have debt you see a worse performance.

The best decision has probably been holding on to assets through this recovery and not being tempted to be too short-termist in our outlook, and actually ending up today with a really good quality portfolio in the right sectors.

What are your challenges and opportunities in 2018?

Challenges are the uncertainty surrounding Brexit and whether that will affect businesses and their decisions around leasing commercial floor space. But we’ve not seen any material change in decision making since 2016’s referendum, so one could be quite relaxed about that – but it would be naïve to discount it altogether. We sold two City of London buildings in 2016 to mitigate against any concern that financial firms might leave the UK.

The opportunities are more of the same for us; it’s all about capturing growth through leasing vacant space and re-setting rents. We’re also likely to become a UK REIT in 2018 – this is to improve efficiencies and to cut costs. If costs are reduced, this means ongoing charges will go down.

Why should people invest in commercial property?

I doubt many people have exposure to commercial property and it’s very different to the residential property market because people in commercial property tend to sign up to longer leases, and the buildings are much cheaper than residential property.

You’re also investing in a real asset – you actually own something. So although prices can go up and down, there’s always a residual value. In the worst-case scenario and the tenant goes bust, you still have the building. Plus, real estate is a good income-driven asset class that has been around for hundreds of years.

However, if you’re investing in an illiquid asset class, I think you need to be in a closed-ended structure. Open-ended property funds are holding a lot of cash now because they don’t know what’s around the corner and whether investors will suddenly want their money back. It’s prudent, but returns will be diluted by that cash holding.

What’s your top tip for a beginner investor?

Invest in things you can understand.

The team behind the fund

Picton Property Income is different to other funds in that it has internalised its investment management function, meaning there’s no investment management middleman. The 11-strong team comprises five real estate professionals, three qualified accountants, and three support staff. Chief executive Michael Morris is responsible for overseeing his staff and for devising and overseeing the implementation of the company’s investment strategy.

Picton Property Income Key Stats

Launched: 2005(i)
Fund size: £463.8 million(ii)
Number of assets: 52(ii)
Yield: 4%(iii)
Ongoing charges figure (OCF): 2.47%(iv)
Sources: (i)Picton (ii)Picton Interim Results, 30 September 2017 (iii)Picton, based on closing share price, 1 November 2017 (iv)Morningstar, 29 November 2017

View Moneywise’s First 50 Funds for beginners. 

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