Here's your chance to buy £1 of commercial property for 40p.
Many commercial property companies have recently enjoyed steep rises on hopes for recovery, but the UK is still in recession unlike some of its European neighbours. One commercial property group specializing in properties outside the UK has yet to partake fully of the recent rally.
The Kenmore European Industrial Fund (LSE: KEIF) has properties in Belgium, Finland, France, Germany, Netherlands, Norway, and Sweden. Of these, France remains the most significant despite recent sales. The country now accounts for a third of the property portfolio.
De-risking
The fund has been selling down assets to release cash and reduce gearing. It now looks to be substantially de-risked and has the potential for a very high forward yield. This doesn't yet seem to have been realised in the share price. At the current price of 28.5p (it went all the way down to 11.5p in February from a high of almost 125p in March 2007) the company is valued at under £40m. The interim results for the first half to the end of June show a net asset value (NAV) per share of 75.2p including cash of £48.4m.
So the shares are trading at an attractive 60% discount to NAV with a good dollop of cash to protect them -- and with gearing at 60.5% it doesn't look like they will breach loan to value (LTV) covenants (the average is c.75%). And that is the basic attraction of the shares on any kind of sustained recovery in the countries listed.
Risks remain
But there's good reason for that discount. The last results still paint a relatively gloomy picture of the commercial property market across the seven countries -- though each is different. NAV looks likely to fall further for a while and the relative weakness of the Euro in the spring knocked more than 8p of the NAV. Looking back further, however, the Euro is still relatively strong against Sterling by historical standards. If the long-term future trend tends back towards a stronger pound, NAV will suffer much more as the fund doesn't hedge the capital side of the currency (though it does hedge the dividend income with six month forward contracts).
The cash pile is also held in Euros as liabilities are Euro-based. The fund doesn't see itself as a currency speculator and is understandably keener to ensure it stays well clear of any LTV problems than on taking exchange rate risks.
The decision for investors at today's price is one of weighing up the risks and deciding to what extent they're already factored into the price.
Future income
The main aim of the fund is to provide an attractive income for investors. The interim dividend was just 0.75p, bringing the yield to a little over 5%; not bad, but not great either -- though reducing gearing is the name of the game in the current economic climate.
If the cash pile is used shrewdly in time, a generalised recovery could see KEIF return to the kind of income it paid previously of over 6p a year giving a potential yield of 20%, pro-rata, for buyers today. After all, operating profits less interest for the first six months came in at over £5m -- or 3.64p per share, during some of the worst economic conditions seen in a long while. On the basis of future income for patient investors, KEIF looks an excellent prospect.
More from David Holding:
David owns shares in KEIF.
