AEW UK REIT: An industry leading 8% dividend yield

An eight-year bull run has made them more expensive, but equities remain the most popular liquid asset for retail investors. Yields have been eroded, too, as savers seek a more generous home for their money, so companies promising an 8% return are few and far between. Imagine our surprise, then, when we caught up with AEW UK REIT recently.

Part of real estate giant AEW Global, an open-ended fund already existed, but demand for a more liquid structure led to the AEW UK real estate investment trust launching on London's Main Market in May 2015. It raised £100.5 million at 100p a share, with a remit to build a portfolio of mainly smaller commercial properties outside of the overpriced London market.

Net asset value (NAV) total return for the 12 months to 31 July 2017 was 11.5%, and 3.06% for the three months to July. The property portfolio valuation grew by 1.4% like-for-like.

The trust's aim is to invest in assets worth £2.5-£15 million, typically with initial net yields of 7.5-10%. There are currently 31 properties in the REIT, but it's fully invested, tenants are paying income streams and new asset management deals are coming through.

"We think it's a good time to raise more capital," AEW portfolio manager Alex Short told Interactive Investor. It's why Short and her colleagues, many of whom left UBS seven years ago to set up the AEW REIT, have decided to raise £40-£60 million.

Assuming an average lot size of £5 million, the fundraising at 100p a share should establish a warchest big enough for up to 10 acquisitions. We're told two properties are already under offer, one of which is high street retail, where a significant decline in value has thrown up "interesting" opportunities.

Crucial to potential investors is the dividend. The company says it expects to pay an annualised dividend of 8p per share for the financial year to 31 March 2018 and for the interim financial period to 30 September 2018.

Big question here is whether the payout is sustainable. Well, AEW has paid a 2p per share dividend every quarter since May 2016, and it is covered. And, while past success is no guarantee of future performance, the REIT is well-managed by a highly-experienced team with a track record of delivering results.

There are other funds running similar strategies, but AEW has chosen to buy one at a time and intensively manage assets, rather than acquire whole portfolios. You typically pay a premium for portfolios, so AEW has built its stable of assets more efficiently.

It's a smart seller, too. Having bought Valley Retail Park in Belfast for £7.1 million two years ago, collecting rent all the time, managers just sold it for £11.05 million.

Of course, a big increase in vacancy rates would present a threat to shareholder distributions, but there's no sign of that here. In fact, Short tells us rental growth is "robust".

AEW also has strong institutional backing, counting Schroders (14.99%), Close Asset Management (10.89%), Old Mutual (9.02%) and Coutts and Natixis with just under 6%, as major shareholders.

Interested retail investors have until midday Thursday to take part in the intermediaries offer of new shares at a price of 100.5 pence per new share. 

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.