Channel Islands Property Fund — Channel Islanders working from the office

Channel Islands Property Fund (TISE: CIPF)

Last close As at 21/06/2024

93.00

0.00 (0.00%)

Market capitalisation

149m

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Research: Real Estate

Channel Islands Property Fund — Channel Islanders working from the office

Channel Islands Property Fund (CIPF) recorded a 5% y-o-y increase in rental income in H123 (to end March 2023) as the fund continues to see 100% rent collection and reduced its vacancy rate to just 2.3%. The manager remains confident in CIPF’s income generation, as the portfolio is characterised by long lease terms (the weighted average unexpired lease term, or WAULT, is over 11 years), and 75% of CIPF’s debt is hedged against interest rate rises until 2027 to its expiry. The fund continues to distribute stable quarterly dividends, implying a 6.9% prospective dividend yield based on the current share price.

Written by

Michal Mordel

Analyst, Investment trusts

Real Estate

Channel Islands Property Fund

Strong H123 results

Investment companies
Real estate

10 October 2023

Price

96.0p

Market cap

£153.5m

NAV*

£155.5m

NAV per share*

97.2p

Discount to NAV

1.2%

*Including income. At 30 June 2023.

Yield

6.9%

Ordinary shares in issue

159.9m

Code/ISIN

CIP/GG00B62DS151

Primary exchange

TISE

AIC sector

Property Direct – UK

52-week high/low

103.5p

91.0p

NAV* high/low

99.7p

95.4p

*Including income.

Loan to value*

45.5%

*At 30 June 2023.

Fund objective

Channel Islands Property Fund was established with the objective of offering an investment opportunity that provides shareholders with a total return from a combination of quarterly dividends and capital growth through the acquisition and active asset management of high-quality office properties in the Channel Islands and the Isle of Man.

Bull points

Properties are mainly multi-let to blue-chip clients. The WAULT is long at 11.2 years at 30 June 2023.

Dividend yield of 6.9%.

The Channel Islands and the Isle of Man have proved very attractive markets during lockdowns.

Bear points

Core markets are capacity constrained.

Low stock liquidity.

NAV growth (excluding dividends) has been modest.

Analysts

Michal Mordel

+44 (0)20 3077 5700

Milosz Papst

+44 (0)20 3077 5700

Channel Islands Property Fund is a research client of Edison Investment Research Limited

Channel Islands Property Fund (CIPF) recorded a 5% y-o-y increase in rental income in H123 (to end March 2023) as the fund continues to see 100% rent collection and reduced its vacancy rate to just 2.3%. The manager remains confident in CIPF’s income generation, as the portfolio is characterised by long lease terms (the weighted average unexpired lease term, or WAULT, is over 11 years), and 75% of CIPF’s debt is hedged against interest rate rises until 2027 to its expiry. The fund continues to distribute stable quarterly dividends, implying a 6.9% prospective dividend yield based on the current share price.

Portfolio by earliest termination date (% of contracted rent, June 2023)

Source: Channel Islands Property Fund

Attractions of investing in Channel Islands property

An investment in Channel Islands property is attractive for two main reasons. Firstly, investment assets on the islands have defensive qualities, including longer-than-average leases versus similar assets on the mainland, and the occupiers tend to be resilient finance industry companies with strong covenants. Secondly, the market is largely unaffected by slowing demand for office space, due to short commuting times (discouraging working from home arrangements) and supply constraints.

Focus on property management

CIPF offers investors a unique exposure to a defensive market, which is mostly unaffected by slowing demand for office space globally. The portfolio is fairly static (the latest portfolio addition was in September 2020) and generates a regular income stream, with long-term visibility on generating cash flow. The property manager (D2 Real Estate, D2RE) sees an ongoing shift in tenant behaviour towards more ‘non-office’ space and increasing emphasis on improving a building’s ESG credentials. D2RE is focused on future-proofing the portfolio by carrying out refurbishments and increasing ESG transparency. While ESG considerations are already part of D2RE’s management process, CIPF’s first sustainability report is anticipated to be published before the end of the calendar year.

CIPF’s H123 results (ending March 2023) came out strong. The fund continues to collect 100% of its office rent (a trend unbroken even during lockdowns) and rental income increased by 5% y-o-y, predominantly due to an increase in rent in inflation-linked leases. CIPF’s vacancy rate remains low at c 2.3% according to our calculations at end June-2023 (down from 3.6% at end-March 2023). The vacant space (c 12k sq ft) includes 6.5k sq ft of refurbished space in St Peter Port currently on offer and, if completed, would reduce the vacancy rate to c 1.0%.

Supply-constrained market ensures demand for office property

The properties continue to see demand from tenants as the Channel Islands have been mostly unaffected by the global trend of leaving offices in favour of working from home arrangements, because commuting times are much shorter than those in major mainland cities. This demand has been exacerbated by limitations on new space development on these small islands. The property manager estimates that in St Helier there is currently around 60k sq ft of office space on offer versus 100k sq ft of as yet unsatisfied tenant demand. D2RE sees further constraints as the projected profitability of developing new properties is under pressure from higher borrowing costs, double-digit inflation, increased build costs and labour and material supply chain shortages or delays. As a result, the property manager does not expect a material increase in project development on current rent levels. Additionally, given the increasing awareness of ESG factors, D2RE sees refurbishments as more eco-friendly than new buildings. While the COVID-19 pandemic did not translate into lower demand on the Channel Islands, D2RE sees some changes in tenant behaviour post-pandemic. The occupiers are repurposing existing space to accommodate on-site gyms, more break-out areas for impromptu meetings and client drop-in suites and adding living plant walls.

CIPF is managing its cost of debt…

CIPF currently puts great emphasis on controlling its debt costs, as rising interest rates are putting pressure on margins. 75% of CIPF’s debt is hedged until June 2027 (the instruments were put in place in H122) and management is confident the fund is well placed to continue to deliver projected returns. The derivative arrangements were signed with NatWest Markets and cover £90m of CIPF’s overall £120m loan exposure. CIPF has an interest rate swap in place for £45m (carried out at 1.67%) and an interest rate cap with a strike rate of 1% on the other £45m. CIPF paid out £2.6m in H123 in financing expenses, representing twice the amount expensed in H122, which includes interest expense, commitment fees on its undrawn amount of debt and costs of hedging. The effective interest rate charged on borrowings also increased to 5.96%, from 2.91% a year earlier. As a result, CIPF’s net income decreased from £4.6m to £4.2m.

…while other costs are limited

CIPF’s ongoing charge amounted to 2.08% of average NAV over the last 12-month period to end-March 2023 (FY22: 2.10%), slightly below the peer average. The charge includes the management fee paid to the investment manager (Ravenscroft Specialist Fund Management, 0.6% of the gross asset value), as well as other ongoing costs of administration, regulators and auditors, among others. CIPF does not charge any performance fees and the majority of property management costs are covered by the service charge.

Portfolio revalued once a year

CIPF’s portfolio still reflects end-September 2022 valuations, when it was down 3.2% y-o-y. The manager highlights that property valuations across the globe are under pressure, as increasing financing costs meet decreasing demand, and CIPF’s portfolio is not immune to these factors. Having said that, it is positioned to withstand the pressure valuation-wise (due to the relatively strong demand on the Channel Islands) and cash flow-wise (due to the interest hedge as described above). The perception of CIPF’s portfolio as robust is likely shared by the market, as CIPF trades at much narrower discount to its NAV, compared to its peers (1% vs peers average at 27%, see Exhibit 1). CIPF is a top performer in its peer group for NAV development over the last year (to end-June 2023) and second best over three- and five-year periods, although a part of the outperformance may come from an outdated valuation.

Property valuations on the Channel Islands are more defensive compared with the broader UK market. This provides comfort for investors in an environment where property valuations are under pressure, such as now (while simultaneously not capturing full bull markets). This is visible in CIPF’s NAV performance versus its peer group over time (see Exhibit 2).

Exhibit 1: Selected peer group at 9 October 2023*

% unless stated

Market cap (£m)

NAV TR
1 year

NAV TR
3 year

NAV TR
5 year

Discount (ex-par)

Ongoing charge ex perf fee

Perf.
fee

Net gearing (ex par)

Income-only yield (%)

Channel Islands Property

153.5

4.6

25.8

46.4

(1.2)

2.1

No

171

6.9

abrdn Property Income Trust

187.6

(22.3)

17.3

15.5

(40.6)

2.0

No

127

8.1

AEW UK REIT

154.8

(9.4)

44.3

61.3

(7.0)

4.6

No

114

8.2

Alternative Income REIT

45.1

(7.5)

20.9

18.3

(31.9)

2.0

No

151

10.8

Balanced Commercial Property

456.0

(18.3)

7.0

(2.5)

(44.3)

1.4

No

129

7.4

CT Property Trust

192.4

(24.8)

10.5

8.2

(13.2)

1.5

No

129

5.3

Custodian Property Income REIT

367.7

(15.3)

18.2

20.8

(14.2)

2.1

No

124

6.6

Ediston Property Investment Co

145.0

(13.1)

5.0

(7.9)

(14.7)

1.4

No

115

7.3

LXI REIT

1,537.9

(12.2)

11.4

42.8

(25.0)

1.1

No

105

7.4

Regional REIT

136.7

(22.4)

(15.0)

(11.2)

(58.6)

5.8

Yes

192

19.8

Schroder Real Estate Invest

203.5

(18.6)

20.7

8.1

(31.5)

3.0

No

144

7.8

Supermarket Income REIT

926.0

(14.5)

9.0

29.1

(18.8)

1.3

No

139

8.2

UK Commercial Property REIT

700.4

(24.4)

7.7

3.5

(32.8)

1.4

No

118

6.2

Value and Indexed Property Income

80.5

(14.6)

4.7

(15.1)

(22.0)

1.5

No

136

6.9

Peers’ average

394.9

(16.7)

12.4

13.1

(27.3)

2.2

133

8.5

Rank

10

1

2

2

1

4

2

10

Source: Morningstar, Edison Investment Research. Note: *Performance at 30 June 2023 based on ex-par NAV. TR, total return. NAV TR is on a cumulative basis. Net gearing is total assets less cash and equivalents as a percentage of net assets. 100 = ungeared.

D2RE believes valuation pressure is most visible for buildings in poor locations, which require capital expenditure to meet new environmental standards and the cost of this will not be recouped by rental income. CIPF’s portfolio, however, consists of Grade A properties but the all-in borrowing costs, even for good-quality property assets, typically start above 7% for both new loans and those needing to be refinanced.

Exhibit 2: NAV performance over the last five years

%

FY18

FY19

FY20

FY21*

FY22

Channel Islands Property

9.5

5.3

8.5

8.7

9.4

Peer group median

8.6

5.0

(5.6)

15.3

12.4

Source: Morningstar, Edison Investment Research. Note: *11-month period.

The board is confident that CIPF will continue to pay a stable dividend

CIPF has distributed a stable 6.6p dividend per share every year in equal quarterly instalments since 2017. Based on the current share price, this implies a 6.9% dividend yield. CIPF’s dividend payout is in line with its peers based on the value of its portfolio but, as its peers trade on higher discount to their NAVs, they offer a higher yield for investors (current average 8.5%, see Exhibit 1).

Over the last few years, CIPF has distributed virtually all its income in the form of dividends and, amid rising financing costs, the dividend cover is being tested. However, part of CIPF’s rental income is linked to inflation, as highlighted in H123 rental income growth, and most of its interest expense is hedged, confirming the manager’s confidence in the ability to continue to pay stable dividends.

As valuations remained unchanged, CIPF’s loan-to-value ratios are broadly stable (the loan-to-market-value ratio stood at 45.5% at end-June 2023). We calculate that the portfolio has room for a c 11% downward revaluation before breaching the most restrictive covenant on its debt. The covenants related to income coverage improved on the back of increased revenues and are far removed from their limits. CIPF’s gearing is relatively high compared to its peers (see Exhibit 1) and any downward revaluation of the portfolio would be more pronounced on its NAV performance than for its peers. However, CIPF’s higher leverage versus its peers is mitigated by the more defensive nature of the market it operates in.

Portfolio positioning

The composition of the portfolio has remained unchanged since our April 2023 note and consists of over 500k sq ft of high-quality property split (by value) between Guernsey (63%), Jersey (25%) and the Isle of Man (12%). CIPF benefits from the longer lease periods on the Channel Islands than in mainland UK and its revenue stream is secured for a couple of years in advance. As at end-June 2023, the WAULT of CIPF’s portfolio stood at 11.2 years and the average period to earliest break clause stood at 7.2 years (as at end-March 2023).

The manager is future-proofing the portfolio

CIPF currently focuses on property management, which includes refurbishments in line with current tenant expectations, as well as an emphasis on ESG. In H123 it fitted out Investec’s offices at Liberation House and refurbished the ground floor of Windward House for BDO, both of which included more ‘non-office’ space than before. D2RE is wary of climate-related criteria and expects that ‘green premia’ and ‘brown discounts’ will continue to increase, meaning it is taking steps to advance its sustainability programme as well as ESG transparency. Unlike the mainland UK, the Channel Islands has not imposed energy efficiency requirements as yet but is clearly moving in that direction. Landlords, such as CIPF, are already being driven by tenant requirements to implement ESG criteria and improve transparency. Jersey will shortly introduce its own version of the UK’s Energy Performance Certificates (EPC) and CIPF expects them to come into force in 2025.

Increasing ESG transparency

CIPF plans to publish its first sustainability report before the end of calendar year in which it will outline its ESG agenda. The fund’s portfolio has already been measured against the UK’s EPC with an overall good scoring, according to CIPF. The fund seeks to ensure that sustainability considerations are integrated in investment decisions and the ongoing management of the portfolio. At the same time, D2RE aims to incorporate ESG in its day-to-day management of CIPF’s portfolio (see examples in our previous note).


General disclaimer and copyright

This report has been commissioned by Channel Islands Property Fund and prepared and issued by Edison, in consideration of a fee payable by Channel Islands Property Fund. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2023 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

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London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

General disclaimer and copyright

This report has been commissioned by Channel Islands Property Fund and prepared and issued by Edison, in consideration of a fee payable by Channel Islands Property Fund. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2023 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

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