UK Commercial Property REIT (LSE: UKCM) is a penny stock that I’ve been watching closely. The investment trust is up 10% in 2021 so far and has increased by almost 25% over the last 12 months. Of course, past performance isn’t indicative of future gains.
Due to the pandemic, the commercial property sector has been hammered. But with the easing of lockdown restrictions and the successful vaccine programme in the UK, I reckon things are looking more positive.
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Hence, I’m bullish on the prospects for UKCM. Hammerson is another commercial property landlord that I’d buy too. But while Hammerson mostly owns shopping centres, this UK penny stock has a more diversified approach.
UKCM is a £1.3bn commercial property investment trust. What I really like about it is that it has a fairly diversified portfolio. Over 60% is invested in the industrial sector, of which almost 40% is located in the South-East of the UK. Its largest holding is Ventura Park in Radlett, which consists of various industrial units.
The rest of the portfolio is split between offices, retail and other properties located across the country. While the pandemic has taken its toll, having exposure to several sub-sectors of commercial property means that the investment trust is in a good position to weather the coronavirus storm.
I also like that over 60% of the properties have a long lease expiry profile. By this I mean that a large chunk of its tenant contracts are five years or longer in length. This is also appealing because its gives me some kind of assurance that rent should be collected, at least in the foreseeable future.
In fact, the average lease length on the portfolio is 9.2 years. And there’s an occupancy level of 96%. This means that most of its properties have tenants and only a small portion are vacant. Again, I think this is encouraging news.
UCKM is trading at a significant discount of 12% to its Net Asset Value (NAV). Couple that with the 3% dividend yield this penny stock offers and the shares look like a bargain to me.
The 12-month average discount to its NAV was over 20% and it’s narrowing. And I think the stock could rise further as the UK fully comes out of lockdown and people return to working in their offices.
The commercial property sector is recovering and this should help UKCM. There were concerns that most people would continue to work from home, but I think that going forward most companies will offer flexible working. This means a hybrid model and so there will be a need for offices. A significant portion of the portfolio is industrial, which has held up fairly well but office space accounts for a chunky 15%.
UKCM has some high profile tenants such as Amazon and Ocado, which are likely to continue to pay their rent. Of course, there’s no guarantee of this with all tenants. If one goes bust, then it’s unlikely UKCM will be able to claw back its rental payments. This could impact the dividend as well and thereby the share price. And of course, 2020 wasn’t a great year as the investment trust made a loss.
But I’m optimistic on the prospects for the commercial property sector and UKCM. Hence, I’d buy the UK penny stock.