IN­VEST­MENT TRUSTS

Many of these prop­erty ve­hi­cles trade at a dis­count to as­set value, is this jus­ti­fied?

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An in­tro­duc­tion to REITs

AREIT or real es­tate in­vest­ment trust is a ve­hi­cle which owns, op­er­ates or fi­nances in­comegen­er­at­ing prop­erty.

The so-called REIT regime came into force in Jan­uary 2007. By Fe­bru­ary of that year nine of the UK’s big listed prop­erty firms had con­verted to REIT sta­tus and more than a decade on, the num­ber of UK REITs is push­ing in the di­rec­tion of three fig­ures.

There has been an ac­cel­er­a­tion in the REIT rev­o­lu­tion since the cri­te­ria was re­laxed in 2012.

Ac­cord­ing to ac­count­ing firm Grant Thorn­ton ‘Since then REITs have be­come an at­trac­tive, on­shore, tax ef­fi­cient ve­hi­cle for in­vestors, of­fer­ing the ben­e­fits of liq­uid­ity and ac­cess to spe­cial­ist sec­tors such as health­care and so­cial hous­ing.’

In this ar­ti­cle we will of­fer a snapshot of the REIT land­scape with a look at the di­verse col­lec­tion of REITs which cur­rently trade in Lon­don.

KEY REIT AT­TRAC­TIONS

The key at­trac­tion of REITs from an in­vestor per­spec­tive is that the tax treat­ment seeks to repli­cate the sit­u­a­tion if you held the un­der­ly­ing prop­er­ties di­rectly.

REITs avoid pay­ing cor­po­ra­tion or cap­i­tal gains tax on their rental in­come or cash gen­er­ated from as­set sales if they re­turn 90% of their prof­its to share­hold­ers as div­i­dends.

Not only do REITs hand more of their earn­ings to share­hold­ers than most other listed com­pa­nies, but the money is only taxed once, at the in­come stage.

At present many main­stream REITs trade at ma­te­rial dis­counts to net as­set value, sug­gest the mar­ket thinks cur­rent prop­erty val­u­a­tions are in­flated.

Jef­feries head of real es­tate Mike Prew, who is bear­ish on the space, ar­gues: ‘REIT balance sheets are an un­re­li­able guide to value and in­come state­ments can be flat­ter­ing.

‘Cash can’t lie and REIT op­er­at­ing cash flows are weak­en­ing lead­ing to div­i­dend con­cerns. We think prime City of Lon­don of­fice ef­fec­tive rents have fallen from £65 per square foot to £48 per square foot and its worse across re­tail as­sets where CVAs are bit­ing hard.’

THE ALL ROUNDERS

Two of the three largest REITs by mar­ket cap in­vest across sev­eral dif­fer­ent prop­erty classes, they are British Land (BLND) and Land Se­cu­ri­ties (LAND).

Both hold a mix­ture of of­fice, leisure and re­tail prop­er­ties, with a lit­tle bit of res­i­den­tial on the side.

Re­cent share price per­for­mance has been fairly sub­dued, with British Land out­per­form­ing its slightly larger coun­ter­part, per­haps sup­ported by the £1bn sale of its joint ven­ture – Lon­don of­fice block 5 Broadgate. This en­abled the com­pany to ex­tend its 2018 share buy­back pro­gramme by £200m.

In the as­sess­ment of Liberum’s real es­tate team, de­spite a flat mar­ket British Land is con­tin­u­ing ‘to balance ac­tiv­ity to de­liver fu­ture value cre­ation, while lim­it­ing its over­all fi­nan­cial and spec­u­la­tive risk ex­po­sure’.

RE­TAIL

A high street slow­down is putting REITs in this part of the mar­ket un­der sub­stan­tial pres­sure. A string of re­tail­ers have en­tered

Com­pany Vol­un­tary Agree­ments en­abling them to close loss­mak­ing stores and cut the bills they owe to their land­lords. This is ob­vi­ously bad news for big re­tail REITs like

Ham­mer­son (HMSO) and Intu Prop­er­ties (INTU).

In April France’s Klepierre gave up on its pur­suit of Ham­mer­son af­ter a 635p per share bid was re­buffed.

Ham­mer­son aban­doned its own £3.4bn merger with Intu amid mount­ing in­vestor un­rest over the move – leav­ing Intu cry­ing foul and on a sticky wicket.

For its part, Ham­mer­son is now look­ing to sell £1.9bn worth of as­sets by the end of 2019 as it fo­cuses on flag­ship re­tail des­ti­na­tions and pre­mium out­lets.

Ham­mer­son in­tends to exit all re­tail parks over the medium term and has pressed pause on the Brent Cross shop­ping cen­tre ex­pan­sion, cit­ing height­ened mar­ket risks.

IN­DUS­TRIAL/LO­GIS­TICS

This is cur­rently the bright­est star in the REIT fir­ma­ment with par­tic­i­pants of­ten trad­ing at a pre­mium to NAV rather than the dis­counts seen else­where.

De­mand for this type of as­set is grow­ing thanks to the struc­tural changes which are neg­a­tively im­pact­ing the re­tail REITs, namely that we now largely shop on­line and this re­quires ware­houses and lo­gis­tics fa­cil­i­ties to ser­vice de­liv­er­ies.

More re­cently some ob­servers have been warn­ing of a bub­ble form­ing in this sec­tor which could be pricked by the un­cer­tainty over the Brexit process. SEGRO

(SGRO) joined the FTSE 100 in mid-2017, pro­pelled by the ware­hous­ing boom.

Other names in this space in­clude Tri­tax Big Box REIT

(BBOX) and small cap Ur­ban Lo­gis­tics REIT (SHED:AIM).

AL­TER­NA­TIVES

The REIT space has broad­ened out in re­cent years and now in­cludes sev­eral in­ter­est­ing niches which are of­ten less cor­re­lated to the wider prop­erty and fi­nan­cial mar­kets.

These in­clude stu­dent ac­com­mo­da­tion, as rep­re­sented by the likes of UNITE (UTG) and

GCP Stu­dent Liv­ing (DIGS) and so­cial hous­ing as rep­re­sented by Civ­i­tas So­cial Hous­ing (CSH) and Triple Point So­cial Hous­ing (SOHO). (TS)

Source: SharePad, 6 Au­gust 2018

Land Se­cu­ri­ties’ re­cently com­pleted West­gate Ox­ford Shop­ping cen­tre has al­most 800,000 square feet (74,000 m2) of re­tail, restau­rant and leisure space

The £1bn sale of 5 Broadgate en­abled British Land to ex­tend its 2018 share buy­back pro­gramme

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