UK Real Estate Investment Trusts (REITs) have been unloved for the past few years, but there are signs that appetite for the sector is picking up – particularly among private equity investors and REIT management teams themselves.
According to the Association of Investment Companies, the average discount of the Property – UK Commercial sector remains close to levels seen in the global financial crisis: it stands at 24%, while the average yield is 8%. This hasn’t gone unnoticed by the smartest REIT management teams who have been seeking mergers and private equity houses that are acquiring and delisting REITs.
Why private equity loves public equity
Private equity simply loves public equity right now. And the trend of private equity acquiring public equity may be about to accelerate. This is because many private equity houses are in the enviable position of having money to spend – and as central banks start to cut interest rates again, using leverage is once again a possibility.
Private equity houses have been particularly attracted to next generation real estate operating in the sub-sectors benefiting from strong secular mega trends, like data centres and self-storage. They love the fact they offer growth income and not fixed income. And these are exactly the same traits the VT Gravis UK Listed Property Fund looks for in its underlying holdings.
Size matters…
..or at least critical mass matters. The biggest REITs can issue new equity and fund their development pipelines. Unite Group has achieved this with its purpose built student accommodation, as has Big Yellow Group in the self-storage space. But others that haven’t reached critical mass are trapped or struggling. The most recent example of this is Lokn’Store, which tried and failed to raise capital at 765p per share last summer and was just acquired at 1110p per share.
When will generalist investors join the party?
While private equity has recognised the opportunity in UK REITs, the persistent discount on the commercial property sector suggests that generalist investors have not yet joined the party. The inflection point could come when the Bank of England announces its first rate cut. At this point, the trickle of investment could easily turn into a flood.
Emma Bird, Head of Investment Trust Research at Winterflood Securities, said recently that: “You can sense the pent-up demand on the sidelines.” She pointed out that in November last year, share prices spiked when UK ten-year gilt yields fell on better-than-expected inflation prints and hopes that rates had peaked.
“On that news, the UK Commercial Property sector rebounded, with the FTSE EPRA NAREIT UK Index returning 12.6% – the best absolute monthly return, and the best relative performance vs the FTSE All Share, since August 2009,” she said, before concluding: “While that bounce has since unwound, it suggests that there is a notable amount of capital waiting to re-enter the property sector once the macro outlook becomes clearer.”
Investing in the next generation of real estate
Investing in property has formed a core element of portfolio construction for years, but times and the sector are changing. Investors need to make sure they are focusing on the next generation of real estate, not the last.
The VT Gravis UK Listed Property Fund is a portfolio of listed real estate securities, most of which are structured as REITs or real estate operating companies (REOCs) and specialise in areas such as purpose-built student accommodation, e-commerce fulfilment centres, urban logistics, self-storage, GP surgeries, care homes, and private rented homes.
The Fund focuses on four powerful socio-economic mega trends: ageing population, digitalisation, generation rent, and urbanisation. It avoids high street retail assets.
The underlying REITs offer attractive dividend yields with growth potential. What’s more, under UK REIT rules, 90% of property income profits must be distributed to investors each year. The Fund capitalises on this and targets 4% per annum dividend yield (growing at a current rate of 4% per annum) with charges of 0.7% taken from capital. It is a Property Authorised Investment Fund (PAIF), which will ensure the maximum tax efficiency and least drag in income paid to tax efficient wrappers.
Other benefits include inflation protection through contractual rental growth, good daily liquidity, lower portfolio volatility, access to specialist sectors and modern, energy efficient, and purpose-built assets, and diversification – VT Gravis UK Listed Property Fund is currently exposed to an estimated 5,000 properties with over 100,000 tenants.
Important information
This article has been prepared by Gravis Advisory Limited (“the Investment Adviser”) and is for information purposes only. It is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to local law or regulation. Any recipients outside the UK should inform themselves of and observe any applicable legal or regulatory requirements in their jurisdiction.
This article should not be considered as a recommendation, invitation or inducement that any investor should subscribe for, dispose of or purchase any securities or enter into any other transaction with the VT Gravis Real Assets ICVC, or any other Fund affiliated with the Investment Adviser. The merits and suitability of any investment action in relation to securities should be considered carefully and involve, among other things, an assessment of the legal, tax, accounting, regulatory, financial, credit and other related aspects of such securities.
Although high standards have been used in the preparation of the information, analysis, views and projections presented, no responsibility or liability whatsoever can be accepted by the Investment Adviser for any errors, omissions, misstatements, loss or damage resultant from any use of, reliance on, or reference to the contents. The views and opinions contained herein may not necessarily represent views expressed or reflected in other Gravis communications, strategies or funds and are subject to change.
The VT Gravis UK Listed Property (PAIF) Fund is a UK Non-UCITS Retail Scheme (NURS) Open Ended Investment Company (OEIC) with Property Authorised Investment Fund (PAIF) status.
Past performance is no guarantee of future performance.
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