How can REITs reduce their discounts in the absence of M&A activity? – The Property Chronicle
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How can REITs reduce their discounts in the absence of M&A activity? M&A is not coming to the rescue of investors just yet, but there are new trends beginning in the listed REIT sector

The Fund Manager

London skyline

Previously in this column we looked at what appeared to be the start of a new trend of M&A in the property sector, following the bids for Market Tech and Kennedy Wilson Europe. However, the trend has in fact not materialised.

It seems that investors would rather acquire individual assets that meet their investment criteria, than acquire a REIT that is effectively a property conglomerate. It is not because there isn’t enough capital around either. The amount of private capital bidding for London assets alone has been enough to buy out the listed REIT sector, according to Great Portland.

Investment volumes were weak in 2016, falling 41% to £42bn, but that is only 20% below the value of the entire REIT sector. London investment halved to £19bn last year. Outside London the market was more resilient, with more deals completing. There was a clear slowdown in the second half of the year after the Brexit vote, with a fall of 27%. However, even the first half had seen weaker volumes in the run up to the referendum.

So, although investment has been weaker, it is not a question of the outlook frightening off investors entirely. The acquisitions of trophy assets like the Cheesegrater and the Walkie Talkie prove there is demand for sector assets, at yields of just 3-4% and at prices above book value too. By contrast the companies that built them trade at wide discounts, because of a more generalised Brexit fear.

Obviously, listed REITs are more sensitive to market sentiment and have therefore reacted to post Brexit concerns and risk aversion. The REITs themselves have been cautious in their outlook statements, especially for the London office market, so perhaps it is no surprise that investors have shied away from the larger groups. Perhaps the REITs will need to show some faith in the market themselves, by investing more of their cash reserves, to tempt investors buy their shares.

The Fund Manager

About Mark Cartlich

Mark Cartlich

Mark Cartlich is a director of Argento Capital Markets, a boutique corporate advisory firm specialising in the property sector, established in 2012. He started his career with Coopers & Lybrand after graduating from Cambridge University. He joined Baring Securities in 1993 and after the takeover by ING he built up the EMEA Real Estate team, which was top rated by Extel in 2008. He moved to Nomura Securities in the same year, as Head of the Property and Infrastructure Research team across global emerging markets and was subsequently the Head of GEMs Property and Infrastructure Research at Religare Capital Markets from 2009 to 2012. After two years covering property and infrastructure companies at the independent research firm Edison, he moved to Sanlam Securities’ UK broking business as Head of the Property and Infrastructure team, before joining Argento in 2016.

Articles by Mark Cartlich

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