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