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Questor: another property-related trust whose income should be Covid-proof
Questor investment trust bargain: ‘ground rents’ are an overlooked investment but no one is going to stop paying them
Questor often recalls the words of one fund manager we spoke to last year: “If you want income, the best investment bar none is property.”
That belief, expressed by Dean Orrico of Middlefield Canadian Income, has been vindicated by the events of the Covid epidemic. Readers will know that the Questor Income Portfolio has made a decisive shift towards property, where certain trusts offer virtually bombproof income.
But it’s important to recognise that not all property trusts are in this category and that a careful assessment of any fund’s underlying sources of income needs to be made.
In the case of today’s trust, we can be reassured. Its income stems largely from the owners of flats up and down the country who must, under the terms of their leases, pay “ground rent”. The Ground Rents Income Fund has the right to receive those payments.
“No matter how bad the coronavirus recession gets, flat owners are not going to stop paying the £250 a year they typically pay in ground rents because doing so would ultimately put their home at risk,” said Nick Greenwood, whose Miton Global Opportunities investment trust owns a stake in the fund.
This has not prevented its share price from being caught up in the panic: it fell by 26pc in the sell-off and has recovered only by 10.6pc since, leaving it 18pc below pre-crisis levels.
That has led to a rise in the yield to 5.2pc. “In a world of zero interest rates, that is attractive,” said Mr Greenwood. “And 69pc of its ground rents have a link to inflation.”
Some have even more eye-catching increases stipulated in the contract, such as a doubling every few years.
Such terms have attracted much criticism in recent years, not least from this newspaper, and are likely to be outlawed by the Government, so it is a relief to know that only 4pc of the fund’s assets are of this type and that its manager, Schroders, has offered to convert them to more conventional terms.
“Ground rents are a long-established means to solve the problem of having the right ownership structure for properties that contain flats,” Mr Greenwood added.
“They allow freeholders to manage common areas and look after the building in a way that wouldn’t be possible if one flat, say, were responsible for the foundations. But in recent years, the idea has been abused by the advent of onerous terms and the extension of ground rents to houses, where there is no need for them.
“These excesses are likely to be curtailed by law but existing contracts of the type largely held by this fund are unlikely to be affected and it can continue to receive its income.
“However, perceptions have weighed on the share price and perhaps half of the current discount of 31.6pc can be attributed to them, while the remainder is down to the pandemic.”
He also acknowledged a problem with a large building in Manchester, where the costs of rectifying window defects may fall on the trust because of the collapse of its builder, Carillion. But he said any costs should not affect the portfolio materially.
The resilience of this trust’s income stream makes it another property-related portfolio well suited to investors who cannot afford to be without income.
The inflation protection is particularly welcome at a time of concern over governments’ willingness to borrow or print money with abandon to help economies to recover from the pandemic and the possible inflationary consequences.
Questor says: buy
Ticker: GRIO
Share price at close: 75.75p
Update: Macau Property Opportunities
We have in the past tipped this trust on the strength of Mr Greenwood’s stake in it.
He acknowledged that the coronavirus epidemic and measures taken by the Chinese government to dampen the property market had affected the portfolio, which is in the process of liquidating itself, but pointed out that it had sold one of its assets for 2pc more than the book value even in the midst of the pandemic.
He said he would hold on until the portfolio was liquidated and we suggest that readers do the same.
Questor says: hold
Ticker: MPO
Share price at close: 67p
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