IT Insider: F&C Commercial Prop - the only risk is dying of boredom

The degree to which the UK property sector has been rehabilitated in investors’ eyes was neatly illustrated recently when F&C Commercial Property announced it would seek to raise £70 million from investors, equivalent to around 10% of its market cap.

The issue price has been set around the same level as the current share price so the shares will be issued at a 3% premium to asset value. The fund has been in demand for some time and the premium has been as high as 13%.

F&C Commercial Property is the lowest yielding fund in its peer group, generating an historic yield of 5.8%, 1.3% less than UK Commercial Property, for example. On that basis, you might question why there is such demand for the stock, but I think its popularity comes from being boring and safe.

In a world shaken by the credit crisis and nervous about highly leveraged vehicles, it has the lowest permitted gearing in its sub-sector (at 50% loan to value versus 65% for the majority of the peer group). Its portfolio is mostly invested in grade A, premium property, with tenants that can pay their rent and with significant exposure to central London offices, the best performing area of the UK property market in recent times.

The leverage comprises £230 million of bonds with a fixed rate of 5.23% (their properties earn more than this so it is income enhancing). Maturity should occur in June 2015 but, if conditions are not conducive to rolling the debt at this time, they can extend this to 2017 at 0.6% over Libor.

Competitive fees

Its fees are competitive. Reset in October 2010, they are set at 0.5% on net assets (reduced to 0.25% on net cash in excess of 5% of the portfolio). There is a performance fee roughly equivalent to 20% of the excess return above 10% over the IPD index, measured on a rolling three-year basis.

Fees are capped at 0.6% of assets in any one year. This should mean that fees are a fraction of those charged on competing funds and eliminates the need to invest in more speculative assets to generate the yield.

The fee reset came about after an approach for the company, from Ignis’s UK Commercial Property Trust, was rejected by the F&C Trust’s independent shareholders. At the time, the rejection of the deal came as a great surprise to most observers.

It had been recommended by both boards and a majority of shareholders were in favour. Unfortunately for Ignis, the two largest shareholders in the F&C trust were not independent and could not participate in the vote.