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Rishi’s Budgetary Dish

8 March 2021

As budgets go in troubled times this one wasn’t too bad and times don’t get much more troubled than this past year. It must be remembered that when the economic brakes were slammed on it was self-imposed and not the result of financial problems, overheating or any of the usual reasons for recession. Much like my old tortoise, large swathes of the economy have been in hibernation, waiting to resurface full of energy when spring arrives. Yes, there will be casualties. Many businesses won’t make it. Covid will undoubtedly have hastened the demise of weak and badly run businesses but some decent ones will fall by the wayside too, particularly in the service sector. However, there are vast funds sitting in the coffers of private equity funds and the like just waiting to pick off those with recovery potential that have been starved of cash. Those businesses will be up and running again in the not-too-distant future – different owners, maybe, but alive and kicking nonetheless.

Then we have the massive increase in household savings over the last year. Don’t tell me you won’t want to be spending some of your accumulated wedge once the shackles come off. The pent-up demand will help the economy pick itself off the ground but the coming months will still be difficult as the layers of Covid protection are unpeeled. That is why Rishi Sunak’s budget is rear-end loaded – continuing help in the near term but increasing the level of pain over the next four years. If he can get the economy firing on all cylinders, by the time we approach the next general election in 2025 he will be hoping he can reduce some that tail-end pain and show us all what a cracking job he’s done.

These measures should take care of the budget deficit, and probably quite quickly. The Covid debt mountain will take years to pay off, however. As I have written previously, whilst interest rates are so low the Chancellor can borrow large and borrow long. Thirty to forty year gilt issues or even perpetual instruments would provide flexibility and allowing the economy to run hottish, keeping interest rates below the level of inflation, will effectively inflate some of that debt away. He might get away with it as long as the vaccines continue to do their job and providing something like a rogue mutant strain doesn’t cause another lockdown – I don’t think the economy nor society could cope with more of that.

Supermarket Income REIT

There are only two areas of the commercial property market I would consider currently – warehouses and supermarkets. We have the first covered by the Tritax Twins and Urban Logistics but there aren’t too many ways into the latter for the private investor. Supermarket Income REIT, to which former Sainbury CEO Justin King acts as senior advisor, provides that vehicle.

SI is building and growing a portfolio of real estate specifically for the supermarket sector with the company’s tenants across all the major chains including Tesco, Morrisons, Sainsbury and ASDA. Supermarkets offer the only area of retail that has escaped and possibly benefitted from Covid. There are absolutely no concerns over the financial health of the tenants nor their ability to meet their rental obligations and the income stream from the properties is clearly visible.

SI this week announced both the acquisition of a Tesco store in Prestatyn for £26.5m and a capital raise of £100m to part fund the pipeline of opportunities it has identified. Due diligence is at an advanced stage on over £200m of properties so it is very likely the funds raised will be deployed quickly. The funds are being raised by a placing at 106p, a tiny premium to the net asset value of 104p and a discount to the 109.5p at which the shares stood before the announcement. The current quote is 107p – 108p. I believe we will see the NAV grow steadily over the next few years, as will the dividend which already offers a prospective yield of around 5%.
The shares are currently categorised as a medium high-risk investment, according to the Key Information Document. I believe this is mainly due to the size of the business with a market capitalisation of only £700m rising to £800m on the strength of this issue. As the company grows I would expect this rating to gradually reduce to medium risk. For those portfolios that have a tolerance for medium-high risk I believe Supermarket Income REIT is an attractive proposition for both income and modest capital growth. The placing and offer for subscription provide a slightly cheaper entry. Interested investors should call us – the offer closes on the 18th March.

Russell Dobbs FCSI
Chartered Wealth Manager