It’s Coming Home
Trade in Soda and Whisky;
Since 2007, the UK commercial property sector has lagged the market by a wide margin. Many forget that between 2000 and 2007, it was one of the strongest sectors. Over the past five years, the UK Real Estate Investment Trust Universe (REIT) has shrunk from 82 companies to just 39. The core driver throughout has been persistent share price discounts to net asset value, which made listed REITs cheaper to buy than their underlying property.
FTSE REITS vs the FTSE All Share – Including Dividends
With fixed administration costs and high debt margins covered by less rent, smaller REITs are proportionally more expensive to run. The solution has been for fewer larger REITs, which are more efficient and more liquid. This remarkable change will make this undervalued, high-income sector more appealing for investors.
LondonMetric (LMP) has been the main consolidator, growing its market cap from £291m in 2008 to £4.4bn today by acquiring multiple competitors. Then came the Americans, with Prologis (PLD) scooping up the UK’s largest REIT, Segro (SGRO), for £12.6bn, which is close to book value. So far, the bid has been rejected by the board.
PLD is the second-largest REIT in the US, worth $133 bn. If SGRO is taken private, the largest listed REITs will become Land Securities (LAND), with a market cap of £4.9bn and trading on 0.75x book, and British Land (BLND), with a market cap of £4.3bn and trading on 0.71x book.
What has taken the Americans so long to arrive? I suppose when you are worth 10x the largest UK property stock, the discount didn’t move the dial. But now they are here, and since the tiddlers have been consolidated, more activity will surely follow. If nothing else, there is a catalyst for the deep discounts to be realised.
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