Assessing the Investment Potential of Unlisted Property Funds in a High-Interest-Rate Environment: The Case of Picton Property Income (PCTN)

The global financial landscape in 2025 remains shaped by persistently elevated interest rates, a legacy of central banks' aggressive tightening cycles to combat inflation. For unlisted property funds, this environment presents a dual challenge: higher borrowing costs and valuation pressures, yet also opportunities for income generation and strategic repositioning. Picton Property Income (PCTN), a UK-focused real estate investment trust, offers a compelling case study in navigating these dynamics. Edison's latest report on PCTN, issued on August 22, 2025, underscores the company's resilience and strategic agility, making it a noteworthy example for investors evaluating unlisted property funds in this climate.

The High-Interest-Rate Conundrum for Unlisted Property Funds

Unlisted property funds, which pool capital to invest in private real estate assets, have historically offered diversification and steady income. However, rising interest rates complicate their appeal. Higher borrowing costs reduce the net operating income of leveraged assets, while valuation models that rely on discounted cash flow analysis become more sensitive to rate fluctuations. Cap rates—the inverse of property valuations—have widened in many markets, compressing returns. Yet, as Edison's analysis of PCTN demonstrates, proactive management and sectoral focus can mitigate these risks.

In a high-rate environment, industrial and logistics real estate have emerged as relative safe havens. E-commerce growth, supply chain reconfiguration, and energy transition demands have sustained demand for warehouses and distribution centers. Picton's strategic shift toward industrial assets—now 64% of its portfolio—positions it to capitalize on these trends. By contrast, office and retail sectors face structural challenges, particularly in urban centers where remote work and shifting consumer habits have reduced demand. PCTN's reduction of office exposure from 30% to 24% since 2022 reflects a disciplined repositioning.

Picton Property Income: A Model of Strategic Resilience

Edison's report highlights PCTN's FY25 performance as a testament to its operational discipline. The company delivered an 8.1% total annual return (TAR), outperforming the MSCI UK Property Index for the 12th consecutive year. This achievement is underpinned by three pillars: dividend sustainability, portfolio optimization, and capital efficiency.

1. Dividend Sustainability:
   PCTN's 2025 dividend of 3.8p per share, a 2.7% increase, is supported by 113% cover from EPRA earnings. This robust coverage, combined with a five-year dividend growth streak, signals management's commitment to balancing shareholder returns with capital preservation. In a high-rate environment, where income stability is paramount, PCTN's ability to maintain a 5.3% prospective yield—despite broader market volatility—stands out.

2. Portfolio Optimization:
   The company's active repositioning strategy has unlocked value through asset enhancement and change-of-use initiatives. For instance, the disposal of three underperforming office assets for £51 million—a 5% premium to March 2024 valuations—demonstrates its willingness to exit non-core holdings. These proceeds have been reinvested in industrial assets and used to reduce gearing to 24% loan-to-value (LTV), a conservative level that insulates the portfolio from refinancing risks.

3. Capital Efficiency:
   PCTN's share buyback program, expanded to £17.5 million, has further enhanced returns. With £11.7 million already repurchased at an average 33% discount to NAV, the program underscores management's confidence in the company's intrinsic value. This discount—25% as of August 2025—presents a compelling entry point for investors seeking undervalued income assets.

The Broader Investment Thesis

Unlisted property funds like PCTN thrive in high-rate environments when they exhibit three traits: sectoral agility, liquidity management, and active governance. Sectoral agility involves pivoting toward in-demand asset classes, as PCTN has done with industrial real estate. Liquidity management—ensuring sufficient cash reserves and favorable debt terms—is critical to avoiding the pitfalls seen in leveraged portfolios. PCTN's 100% fixed-rate debt with maturities in 2031/32 exemplifies this. Active governance, including rigorous asset enhancement and cost control, further differentiates high-performing funds.

For investors, the key question is whether the current discount to NAV reflects undervaluation or risk. Edison argues the former, citing PCTN's 7.5% reversionary rent potential—16% above contracted levels—as a catalyst for future earnings growth. This reversionary potential, concentrated in the industrial portfolio, provides visibility on income expansion. Additionally, the company's energy-efficient upgrades (83% of properties now rated A–C) align with regulatory trends, enhancing long-term asset value.

Risks and Considerations

No investment is without risk. PCTN's focus on industrial assets exposes it to cyclical downturns in manufacturing or logistics demand. While the sector remains resilient, over-reliance on a single asset class could amplify volatility. Furthermore, the UK property market faces macroeconomic headwinds, including inflationary pressures and potential regulatory shifts. Investors must also consider the illiquidity of unlisted funds, which may limit exit flexibility.

Conclusion: A Case for Strategic Allocation

In a high-interest-rate environment, unlisted property funds require careful selection. Picton Property Income's combination of sectoral focus, disciplined capital management, and active governance positions it as a standout option. Its 25% discount to NAV, coupled with a 5.3% yield and 12-year outperformance streak, offers a compelling risk-reward profile. For investors seeking income resilience and long-term capital growth, PCTN exemplifies how strategic agility can transform macroeconomic challenges into opportunities.

As central banks navigate the path to rate normalization, the ability of unlisted funds to adapt—like PCTN's pivot to industrial real estate—will remain a defining factor in their success. Those who recognize this dynamic may find themselves well-positioned for the next phase of the cycle.