With more than £14bn in assets under management, UK real estate investment trusts — better known as REITs — have long offered investors a way to access property markets without the burden of buying buildings outright. From vast logistics warehouses and data centres to high street retail parks and suburban offices, the sector spans much of the built economy.
But in recent months, attention has shifted from what REITs own to how they are valued — and whether investors are being adequately compensated for the risks.
At present, the UK commercial property sector offers an average yield of about 8.4 per cent, a figure that reflects the income investors receive relative to share prices. Many trusts are also trading at steep discounts to the value of their underlying assets — roughly 25 per cent on average. In simple terms, investors can buy shares in property portfolios for significantly less than what those properties are theoretically worth.
For income-focused investors, that combination of high yields and discounted valuations can appear compelling. Yet it also raises a question: why the disconnect?
Part of the answer lies in the past few years of rising interest rates, which have weighed on property valuations and increased borrowing costs. Another factor is uncertainty about future rental growth — the engine that ultimately drives returns in real estate.
“We are now the largest logistics real estate business operating in the UK,” said Bjorn Hobart of Tritax Big Box REIT [LON:BBOX], which recently joined the FTSE 100. Logistics — the warehouses that underpin e-commerce and supply chains — has been one of the sector’s strongest performers. Hobart pointed to “record rental reversion”, a term used to describe the uplift in rents when leases are renewed at current market rates, often higher than older agreements.
Others echo that focus on income resilience. Richard Shepherd-Cross of Custodian Property Income REIT [LON:CREI] emphasised that growth in his portfolio has been driven not by falling yields — which can artificially inflate valuations — but by genuine rental increases and active asset management. “This should be sustainable long-term growth,” he said.
For those less familiar with property jargon, “asset management” in this context does not mean trading shares, but improving buildings themselves — refurbishing units, renegotiating leases or upgrading facilities to attract tenants willing to pay higher rents.