Questor: is Regional Reit mad to bet the farm on offices when we are all working from home?

A decision to buy more offices may look like a brave one at a time when many are empty and when working from home holds sway. But this is what one of our Income Portfolio’s property funds will do.

Regional Reit said last week it would sell its remaining non-office property, which accounts for about a fifth of its portfolio. Currently about 14pc is in industrial units and 4.3pc in retail.

Why would you purposely concentrate on the very type of property whose occupants can choose to work elsewhere – unlike workers in factories and shops? Would you not fear that this would ultimately lead to half-occupied space and a wish on the part of tenants to find smaller premises and so, across the market as a whole, less demand and downward pressure on rents?

All of that may come to pass in certain markets, especially London. But Regional, as its name suggests, avoids the capital and instead focuses on what it calls the “Big Nine” regional markets – cities such as Glasgow, Leeds and Birmingham. The trust has talked of a “lack of availability” of office space in these areas that “put an upward pressure on headline rents”.

It was referring to the pre-pandemic period but a shortage of supply is a good place to start for a property company. If we look at what has happened more recently there is scant sign of tenants’ reluctance to commit to future occupancy: between July and September Regional achieved rent increases of 12.2pc on the leases renewed in the period. Of 29 new leases agreed so far in 2020, eight have been signed since June.

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When the trust sells a property there is not much sign of pressure on values: it sold property worth £5m in the third quarter at prices 15.4pc higher than the valuations in June.

The trust’s philosophy is far removed from the traditional idea of property as a passive investment that simply generates rental income. The managers instead seek to buy well, improve and sell in order to recycle capital into the next opportunity.

This approach strikes Questor as well suited to the post-pandemic world: the trust can refurbish offices to suit new patterns of occupancy and will doubtless look for bargains among buildings that struggle to attract tenants in the absence of that kind of modification and whose current owners lack the required skills.

Another source of comfort is that it currently has many blue chip occupiers, such as NatWest, Barclays and Aviva as well as government departments. We see this as a very well-run fund able to rise to the challenges posed by the pandemic and its aftermath.

Questor says: hold

Ticker: RGL

Share price at close: 80.7p

Update: Legal & General

Last week we promised to publish more details of L&G’s new goals for the next five years.

It described 2020 as a “pause year” and as a result said its current intention was to pay an unchanged final dividend of 12.64p. As its interim divi of 4.93p was also unchanged, we can expect a flat full-year payment of 17.57p, which would equate to a yield of 6.8pc at the current share price.

A flat dividend is a slight disappointment set against our previous expectation of a rise: in August the insurer said it would “set a final dividend in line with our dividend policy”, which was to pay a “progressive” – City jargon for rising – divi. In light of the second wave and the complete absence of dividends from many banks and insurers we can forgive L&G for this, however.

And rises should resume: “From 2021 the board intends to grow the dividend at low to mid-single digits,” it said last week.

Not that it intends the dividend to be paid at the expense of growth. It said its “ambition” was for cash and capital generation to significantly exceed dividends. In fact it put a number on those ambitions: it wants to generate £8bn-£9bn of cash and the same amount of capital, and to spend just £5.6bn-£5.9bn of the cash on the dividend.

It also wants earnings per share to grow faster than dividends.

A rising, well-covered dividend does not square with a yield of almost 7pc, a level that normally signals stressed finances. This means the shares are cheap; we rate them an excellent home for any surplus cash and they will of course remain in the Income Portfolio.

Questor says: hold

Ticker: LGEN

Share price at close: 258p

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