This column has championed infrastructure funds such as 3i’s for years now as offering an assured income not easily available elsewhere. Yesterday’s economic data and decision by the Bank of England to hold base rates yet again does nothing to make such investments any less attractive.
It is appropriate, then, that last June 3i Infrastructure should have carried out the biggest capital raising the quoted infrastructure sector has seen since the company floated in 2007, a total of £385 million, and seen it heftily oversubscribed.
Encouragingly, the fund managed to spend the money by the end of the year. Two investments were pending at the time of the cash raising, in Wireless Infrastructure Group, which puts up phone masts, and TCR, a Belgian provider of airport facilities.
Two more were completed subsequently, in Valorem, a French wind farm operator, and Infinis, which supplies landfill gas for electricity generation. This left about £80 million of debt at the financial year end in March. 3i Infrastructure has plenty of borrowing facilities available but does not tend to borrow for long and at some stage will have to raise fresh funds.
There are other options open, though, than another share issue. The fund does not tend to go in for disposals, but several are available. The recent purchase of Affinity, a water provider in the southeast, by a group including another infrastructure fund, HICL, has shown the potential for 3i’s stake in Anglian Water, on the books at £281 million.
Elenia, a Finnish power distributor, will be on the market in due course and 3i’s stake is valued at £418 million. Neither of the two offer the sort of yield 3i can get elsewhere, and disposals would not only pay off the debt, but they would also free up capital to invest elsewhere.
Last year a record £479 million was invested in those four companies and on a couple of public private finance projects, and this year’s total should be well below this. Investors will have little to complain about. The shares, up 1p at 195p, are trading at well above the closing net asset value of 169p, but the return of 9.4 per cent last year is at the top end of the target range and the dividend forecast for this year suggests a forward yield of 4 per cent.
My advice Buy
Why The fund’s record speaks for itself and shares offer good prospects for capital growth as well as an attractive dividend yield
Derwent London
Of the shares to be hit by the referendum and the uncertainty around Brexit, Derwent London might be expected to be towards the top of the list. The company is entirely exposed to the London property market and a lot of its assets are the sort that attract high tech and media entrepreneurs, such as the landmark White Collar Factory in trendy Old Street that is complete and almost fully let.
The shares, up 27p at £28.81 after the first-quarter update, are well below the £36 or so seen at the start of the year. They are also at a fair discount to the last published net asset value for the end of last year of £35.51. There is little in the update, though, that indicates the company’s portfolio is running out of steam.
Next month, Derwent will pay £100 million, or 52p a share, as a special dividend. This reflects two unexpected disposals, one in Euston as part of the HS2 project and another in Fitzrovia to a tenant that wants the rest of the building. This is not a case of failing to find a purchase to recycle the excess capital because the company has a well-developed capital spending programme for London properties, although the loan-to-value ratio is a fairly conservative 16.5 per cent.
The update shows that Derwent is still finding tenants at a decent premium to expectations. Lettings since the company reported results in February are running at 4.6 per cent ahead estimated rental value.
The shares on most measures look cheap, but they are still a hefty punt on an uncertain London property market.
My advice Buy
Why Speculative, but a good bet on London property
Tritax Big Box Reit
As the name suggests, Tritax Big Box Reit invests in big boxes, those huge out-of-town distribution depots increasingly needed because of the rise of online shopping. It is an area others are also doing well in, such as Segro.
Retailers cannot get enough of such properties, and this is arguably the hottest area in the sector at present. Investors cannot get enough of Tritax as well, seemingly. A £350 million placing last year was oversubscribed and used to fund further developments. A second issue, initially targeting £200 million of fresh funds, has had to be increased to the maximum of £350 million because of strong investor demand.
This is perhaps not surprising because this is another of those Reits that offers a good return to investors. The shares were issued at 136p; on forecasts of this year’s dividend, successful applicants will get a forward yield of 4.7 per cent.
This is what was on offer when this column recommended the shares at 133p in December. The shares have advanced since and added 4p to 146¼p yesterday. Like all trendy areas of investment, one day this will turn down. Caution advised.
My advice Hold
Why Yield on existing shares is less compelling now
And finally...
Along comes a second favourable update from the student accommodation sector, after Empiric Student Property yesterday. Unite Group is at the racier end of what is a pretty stable market, with strong ambitions to grow both its estate and earnings by 2019, ambitions reiterated at yesterday’s annual meeting along with the reassurance that bookings are a touch ahead of last year with no obvious fall-off in demand from home and foreign students. Unite says it can see opportunities for 2020 and beyond.
