Property has always been a favoured comfort zone for British investors. But since tax and legal reforms have robbed buy-to-let of much of its allure, attention is switching to commercial property in the shape of Reits – real estate investment trusts.
This week’s upsurge in bid activity is one reason why Reits suddenly seem exciting. The nature of their holdings provides a sense of reassurance in a time of turbulence.
The warehouses, retail parks, offices and other buildings owned by Reits are ‘pace’ (physical assets, compounding earners) investments. The new interest in such solidity comes alongside the growing appreciation for ‘halo’ (heavy assets, low obsolescence) companies, with resilient balance sheets and a competitive advantage.
A steady income is another of Reits’ attractions. They must pay out 90 per cent of profits within one year in the form of dividends; the average yield for the sector is 8.4 per cent.
Matthew Norris, manager of the TM Gravis UK Listed Property fund, highlights the diversity of Reits’ sources of income.
He says: ‘Reits provide recurring or ‘compounder’ income of three types. Some receive long-term, index-linked rents from their tenants. Others benefit from rents that are subject to upwards-only reviews. Meanwhile, the Reits that operate their own assets, such as storage group Big Yellow, seek to maximise their income.’
Vibrant: Since tax and legal reforms have robbed buy-to-let of much of its allure, attention is switching to commercial property
TM Gravis UK Listed Property has stakes in some of the £14billion Reit sector’s major players. Among them are: Segro, whose data centres supply computing power for artificial intelligence (AI); Target Healthcare, the care home provider; and Tritax Big Box, the UK’s largest logistics group.
The fund’s stakes also include LondonMetric, the urban warehouse specialist, Schroder Real Estate and Picton – which has a business park and office portfolio. This week it emerged LondonMetric is teaming up with Schroder to bid for Picton.
We also learnt that AEW, a Reit that specialises in revitalising high street premises, is intent on snapping up the tiny Alternative Income.
Blackstone, the $85billion US group, loves a UK Reit, or so it seems. Its acquisitions include Industrials Reit, St Modwen and Warehouse Reit. Blackstone also owns 9 per cent of Tritax Big Box.
This deal-making is the reason why the sector could be a happy hunting ground for private investors keen on risk, but looking for attractively valued opportunities.
If that sums you up, then these Reits are worth considering.
THE HEALTHCARE OPTIONS
The current average Reit ‘discount’ is 25 per cent. This is the gap between the trust’s net asset value (NAV) and its share price.
Discounts have widened due to fears interest rates could be raised to counter the inflation being caused by the war in the Middle East. This would be bad news for Reits with substantial borrowings. But a bounce in inflation would boost the level of index-linked rents. And one beneficiary would be Primary Health Properties, which provides surgeries for GPs.
This Reit is described by brokers Shore Capital as ‘a new social infrastructure powerhouse’ following its purchase of fellow NHS landlord Assura.
In the tussle for control of Assura, Primary Health Properties bested US private equity giant KKR. Could the latter now eye other UK Reits? Maybe.
Analysts consider Primary Health Properties a ‘buy’, reckoning shares could increase from 90p to 114p.
Target Healthcare is another ‘buy’ at 98p. Britain’s ageing population means there will be more clamour for this REIT’s care homes. But there is also the suspicion that a US predator could view Target as a steal at its current 19 per cent discount.
On a charge: The model outside the Bullring in Birmingham
THE ALTERNATIVE BUY-TO-LET
The Renters’ Rights Act, which takes effect on May 1, makes the landlord business even more administratively burdensome – and a lot less lucrative.
This may be why Mike Ashley, the founder of Sports Direct, has bought 3 per cent of Grainger which provides family-oriented rental properties in purpose-built blocks.
Whatever Ashley’s motive, his manoeuvring suggests that Grainger may be worth a bet on rental market disruption.
Helen Gordon, Grainger’s chief executive, earlier this year said demand for its properties continued to grow because of the undersupply of rental accommodation and ‘the headwinds facing small, private landlords’.
Grainger shares have been hit by anxiety over the additional freedoms granted to tenants. But analysts rate the shares a ‘buy’ at 160p, seemingly convinced the legislation will cause more landlords to quit. Grainger should also be able to meet the enhanced rental home quality standards that may be enforced in future.
Big Yellow is a play on the residential property market, too. People selling a home routinely stash clutter in the company’s trademark yellow storage centres. Its shares stand at 865p, below their level when Blackstone launched an unsuccessful bid late last year. Analysts are divided as to whether the shares are a ‘hold’ or a ‘buy’. But the optimists have set an average target price of 1,205p, hinting at the possibility of another bidder.
THE BUILDING BLOCKS
Interest rate uncertainty means that most of the super-sized Reits are seen as a ‘hold’. On this list are: Segro; British Land, whose portfolio includes the Broadgate centre in the City; Derwent, the offices specialist; Hammerson, the Birmingham Bullring group; and Land Securities, whose most famous asset is the Piccadilly Lights site which contains the advertising screen, shops and offices. Land Securities is selling the site but will continue as manager.
Tritax Big Box, however, is seen as a ‘buy’ at 141p, partly thanks to its debut in data centres, with a development at Manor Farm, near Heathrow.
Reits may be simple to understand, but assessing their relative merits is tricky. A fund is an easier option if you want someone to do the work for you. TM Gravis UK Listed Property is an option. The TR Property trust is Interactive Investor’s best buy.
Both of these have a large slice of LondonMetric. This Reit is considered a ‘buy’ by analysts.
Behind this lies the Reit’s strategy: although it invests in Britain, its strategy is more American. This involves more emphasis on earnings growth and the payment of quarterly dividends – LondonMetric’s yield is 6.92 per cent.
Could other managers follow this playbook to enhance their profiles and slim their discounts? Investors will be hoping so.
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