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.