The Reit is one of the summer’s hottest investments, an object of desire among the US groups that are currently scouring Britain for giveaway buys.
If you are, as yet, unfamiliar with the Reit, which stands for real estate investment trust, it is time to become acquainted.
Why? Because more of these trusts – which own commercial property in the shape of logistics sheds, offices, GPs’ surgeries, shops and warehouses – could get snapped up on the cheap.
This week, Prologis, the San Francisco-based industrial real estate titan, won its battle for control of Segro, Britain’s largest listed property company.
Prologis is paying £14.3billion for Segro, a business founded in 1920. Under its former name of Slough Estates, it was the setting for comedy drama The Office.
The offer is at a 42 per cent premium to Segro’s closing price on June 23, a day before Prologis emerged as a suitor.
Some believe that the American bidder is still paying too little. Others say that Prologis’s assiduous pursuit underlines the attractiveness of Reits to such investors.
US private equity firm Blackstone acquired Warehouse Reit last year and may be interested in more such moves.
Segro was the inspiration for The Office’s Slough Estates and has not been considered exciting but US giant Prologis paid a 42% premium to buy it
Matthew Norris, who is the manager of the Gravis UK Listed Property fund, describes Segro as a ‘fantastic business’ whose merits have been overlooked by UK pension funds and other institutional investors.
He says: ‘The stock market is pricing Reits as if they’re broken. They aren’t. These companies own high-quality, income-producing assets, yet many still trade at deep discounts to what they’re worth.
‘If British investors don’t wake up to this soon, there’s evidence that overseas buyers like Blackstone and Prologis will continue to do it for them.’
Small investors minded to take advantage of these conditions should act now to get a slice of the action, and maybe also to help arrest the economy-damaging shrinking of our stock markets by overseas takeover bids.
Reits’ share prices could appreciate and, meanwhile, the dividends are generous. If you would like to explore this overlooked sector, here’s our guide…
Why Reits quietly started to rock
The US passion for Reits is based on the assessment that there are bumper bargains to be had in this undervalued sector.
The share prices of most Reits stand at a discount of 20 per cent or more to their net asset values (NAVs), due to economic and political uncertainty, higher interest rate fears and gloom over the prospects for some high street retail units and ‘secondary’ (shabby) office space.
Conditions have been suppressed since 2022, says Laura Elkin, manager of the AEW Reit. But she thinks the tide could be turning.
This perception could begin to narrow discounts. In the meantime, however, Derwent is at a discount of about 40 per cent.
This is thanks to the less desirable nature of some of its offices, although this £2.34billion Reit also owns the luxurious workplaces sought after by Silicon Valley AI players who are establishing London headquarters.
In light of this clamour for upscale workplaces, US bank Goldman Sachs, which became an enthusiast for the Reit sector this summer, rates Derwent shares a ‘buy’, setting a target of 2370p, against Thursday’s price of 2054p.
Even the £4.6billion Tritax Big Box is at a 14 per cent discount, despite it having won the go-ahead last week to build a 74-acre data centre complex at Manor Park, near Heathrow.
This column highlighted the potential of this development last September when Tritax Big Box shares were priced at 142p.
I invested at the time and trust that there could be more gains, as the shares continue to be rated a ‘buy’ by Goldman Sachs and others.
On Thursday, Tritax Big Box announced that it was raising £350million for further data centre investment, leading Andrew Saunders, equity research analyst at Shore Capital, to restate his view that Tritax is ‘one of the most appealing Reits’.
Not surprising, since data centres provide the vast computing power required by AI – and Britain has a third of the data centre capacity per person of the US.
British Land is the property company behind London’s Broadgate and yields 5.5%
Reits and retail therapy
A renewed desire for a visit to the shops is proving good news for such smaller Reits as the £162million AEW and the £354million NewRiver, both of which should give a fillip to a portfolio.
Elkin invests for income and growth in the ‘future-proofed’ parts of high streets, the buffed-up sections where you can shop and have a coffee.
This same mix of amenities and socialising is available on ‘retail warehousing’ sites, the retail parks on the edges of towns where you can find a Marks & Spencer for clothes and food, DIY stores, cafes and, maybe, even a dentist.
Saunders cites as one example NewRiver’s The Moor retail park in Sheffield, where the tenants include HSBC, Five Guys, Next, Sainsbury’s and Primark.
So enticing is this formula that the estate agencies Knight Frank and Savills both report negligible retail park vacancy rates.
This is the case at the retail parks that are part of the portfolio at Land Securities, the £5.3billion Reit, which also owns the Bluewater and Liverpool One malls.
Land Securities has a yield of 5.8 per cent and is another Goldman Sachs ‘buy’ recommendation.
The US bank is also enthusiastic about British Land, where the yield is 5.5 per cent. I took a small stake in this £4.5billion Reit because of the superior quality of its offices, such as the refurbished Broadgate in the City and Regent’s Place in the ‘Knowledge Quarter’ around King’s Cross.
This complex was smart enough to lure the AI business Anthropic, which, like its peers, is picky about workplace comforts, such as air conditioning, break-out areas, cafes and kitchens.
LondonMetric, a £4.6billion Reit with a 6.6 per cent yield, specialises in making life easier for online shoppers with its last-mile sheds which ensure the rapid delivery of packages.
Unusually, Goldman Sachs takes a neutral stance on LondonMetric. But other analysts like this Reit’s ruthless US-style focus on costs and rate the shares a ‘buy’ at 198p.
Can Reits keep rising?
More bids are rumoured. If you would like exposure to this activity, take a look at Gravis UK Listed Property and TR Property which have shares in the possible targets and the predators.
While doing your research, you will learn that the discounts have drawn the attention of Saba, the New York hedge fund led by Boaz Weinstein. Saba has taken a holding at the Workspace Reit and Weinstein is using his power to force reforms that are unlikely to benefit the Reit or its investors. This has been his playbook at other trusts.
Saba’s intervention is dispiriting. But perhaps if ordinary investors realise what they have been missing and reassess the merits of Reits, Saba may find its brand of interference to be prohibitively expensive.
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