Can REITs keep up with the current demands of UK shopping centres? – The Property Chronicle
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Can REITs keep up with the current demands of UK shopping centres?

The Fund Manager

In the face of declining retail property values and highly leveraged companies, a new structure might be needed

Real Estate Investment Trusts (REITs) have been a huge success globally, providing an income-producing, liquid, tax-efficient structure for investors to participate in real estate. The key to their success is the high dividend pay-out ratio, which provides an ongoing cash return to shareholders. Globally, shopping centres have been the key asset class of some of the largest REITs, and indeed the sector has been structurally overweight in shopping centres. Why so? Because shopping centres are multi-tenanted, large assets, requiring ongoing capital expenditure, producing historically stable cash flows, and asset management opportunities. As such, they were ideally suited to both asset owners and investors.

However, two UK REITs (Intu and Redefine) have recently announced that, due to currently high leverage and declining retail property values, they would cut their dividend to preserve cashflow. In traditional corporate finance theory, which looks across all 11 equity sector groupings, there is some debate (i.e., conflicting evidence) as to the importance of dividend pay-out ratios on corporate valuations. However, for a REIT, there can be no such debate. The fundamental purpose, and indeed the reason for the tax efficient REIT structure, is that a high, fixed percentage of taxable rental income is paid out to shareholders. To cut the dividend, albeit potentially temporarily, is therefore an admission that the vehicle is no longer capable of producing cash (i.e., dividend) income returns for shareholders. At a time of declining property values, and thus declines in forecast net asset value, the dividend pay-out has traditionally provided an anchor, or floor, for the equity valuation. Removing this floor changes the nature of the equity from an income producing REIT, to a non-income producing option. Therefore, the question becomes; is this part of a wider problem regarding corporate structure, or is this merely a couple of examples of over leveraged companies operating in structurally declining markets, with over dependence upon weak covenants?

Given the divergence in performance between sectors, particularly retail and industrial, and indeed in the parallel asset pricing model,between the listed sector and the direct market, it is worth examining whether REITs are the appropriate structure to hold UK shopping centres.

The alternatives can be broadly split into the following binary categories:

  • REIT/PropCo.
  • No Leverage/High Leverage.
  • Open Ended Fund/Closed Ended Fund.
  • Perpetual/finite Life.
  • Core/CorePlus/Value Add/Opportunistic.

In the current UK environment five factors are known:

The Fund Manager

About Alex Moss

Alex Moss

Alex is responsible for developing the newly created Centre for Real Estate Research at Cass Business School. He also runs Consilia Capital, a research and advisory firm, which specialises in the performance and strategies of real estate, infrastructure and real asset funds, work that combines academic research with practical applications. He has been involved in research and transactions in the global real estate sector for over 30 years. His career has encompassed sell side research (BZW, Macquarie), investment banking (CSFB), private equity (Apax Partners Capital), and fund management (M&G and Investec). He is Chairman of the EPRA Research Committee, a member of the EPRA Advisory Board, and Chairman of the Investment Committee for the Investec Global Real Estate Securities Fund, where he acts as a consultant. Alex is best known for his academic and commercial work in the area of Global REITs, and their use in investment strategies. In 2013, with Professor Andrew Baum they produced two innovative papers for EPRA which received wide acclaim, looking at whether listed real estate was managed as part of the real estate allocation, and the wider use and applications of listed real estate securities in asset management. His work with Kieran Farrelly on combining direct and listed property for Defined Contribution Pension schemes won a Best Paper award at the 2014 ERES conference. A particular area of interest is the use of Smart Beta and automated trading strategies, most notably Trend Following and Momentum, and his work in this area with Professor Andrew Clare and Professor Steve Thomas has been widely cited. In 2017, with Reitsmarket he produced two multifactor Global REIT Smart Beta indices, which are listed on Euronext, and marketed by Goldman Sachs. Most recently he has been concentrating on the use of listed real estate within real asset strategies.

Articles by Alex Moss

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