A Background – What are REITs?
REITs – real estate investment trusts – trace their origins, like a number of other workable business models, to the United States where the first real estate trusts were formed in the wake of enabling legislation in 1960. The aim then and there in the US – as it is today in the United Kingdom and a growing number of other countries around the world – was to create an investment vehicle which allows ordinary folk to invest in sizeable holdings of real estate, hitherto the preserve of large funds and wealthy individuals.
The UK is a relative late-comer to the Real Estate Investment Trust scene, with the necessary legislation being enacted only in 2006 (compare Australia – 1971 and Brazil – 1993). From modest beginnings in 2007, when eight property companies converted to REIT status, the UK market for freely-tradable securitised real estate holdings, or real estate investment trusts, has grown to a total of 25 participants. In this piece, as an accompaniment to our overview of REITs generally [Real Estate Funds (REITs) –The Alternative To Direct Investment In Property], we take a look at the REIT scene specifically in the UK and at some of the more prominent players.
Actually though, of those 25 we exclude four because they’re not traded on a UK stock exchange – three are listed in the Channel Islands and the fourth in Luxembourg – and therefore aren’t truly ‘UK REITs’. And one of the remaining 21, though notionally still listed, is at death’s door, having been put into receivership in 2011. Today, shares in the real estate trust Warner Estate Holdings plc (LON: WNER) can be had for one penny, giving it a market capitalisation of barely half a million pounds.
Which leaves us with 20 UK REITs, all of which are listed and traded on the London Stock Exchange. Indeed, until recently an LSE listing – with its stringent requirements and high cost - was in effect the only permissible way for a property-owning company to acquire Real Estate Investment Trust status. Now, the barriers have been lowered as the government seeks ways and means to breathe fresh life – and capital - into Britain’s sluggish economy and its real estate sector in particular. Amongst other tweaks to the rules governing Real Estate Investment Trusts, since July last year it’s been permissible for an existing property company, or a start-up for that matter, to list on secondary exchanges, with their less demanding requirements regarding pedigree, capitalisation and ownership spread. In the UK, for now this primarily means AIM – the alternative investment exchange operated by LSE – but other trading mechanisms may emerge which could be utilised by and foster the growth of the UK’s real estate trust market.
UK-REIT Market Still In Infancy
Compared with the US-REIT universe, the UK scene remains tiny. In their ‘Global Perspectives – 2012 REIT Report’, Ernst & Young put the market cap as of 30 June 2012 of the approximately 160 listed American REITs at $632 billion. For the UK, their estimate was $38.23 billion – just six percent of the American market. The largest US-REIT, Simon Property Group (NYSE: SPG) – which describes itself as the world’s biggest property company, has a market capitalisation of something approaching $50 billion, 30 percent larger than the entire UK market and dwarfing the largest British REIT, Land Securities Group plc (LON: LAND), which weighs in at around $10.46 billion.
Land Securities is the undisputed heavyweight amongst UK REITs and one of just eight in the ‘billion-plus’ club, meaning over £1 billion in market cap. Its nearest contender for the title is British Land Company plc (LON: BLND), currently assessed by the market to be worth around £5.11 billion. These two companies represent some 41 percent of the total UKREIT market by capitalisation. Jostling for third place overall are Hamersonplc (LON: HMSO - market cap £3.53 billion) and Capital Shopping Centres Group plc (LON: CSCG - £3.11 billion). Of the 14 which weigh in at under £1 billion (and excluding the moribund Warner Estate Holdings), the range is from London & Stamford Property plc (LON: LSP) at £605 million all the way down to The Local Shopping REIT plc (LON: LSR), valued by the market at just £20.4 million.
UK REIT Rankings Not Size-Driven
But as elsewhere in investment – and life – size isn’t everything. In a useful contribution to the still-modest literature on UK REITs, accounting firm BDO last year published its inaugural UKREIT Survey, covering the 20 Real Estate Investment Trusts mentioned earlier (ie, excluding those not listed in the UK) and their performance over the year to 31 March 2012.
Ranked second and third in BDO’s survey were two entrenched members of the ‘billion-plus’ club – Great Portland Estates plc (LON: GPOR - £1.55 billion) and Derwent London plc (LON: DLN - £2.22 billion) in that order. Both are focused exclusively on central London office space.
Diversity Not The Be-all And End-all
And indeed, as with size, diversification in holdings does not – at least as illustrated by the BDO analysis – inevitably correlate with performance. The most diversified of the 20 Real Estate Investment Trusts examined – also the two largest – are Land Securities and British Land. Land Securities has office and retail holdings across the UK, together with accommodation – the bricks and mortar of the Acor hotel chain (Ibis and Novotel brands). British Land’s interests are more closely focused on Greater London but encompass both office and retail. They could manage only 9th and 5th respectively in the overall rankings.