UK REITs – An Infant With A Promising Future
Born Just Five Years Ago, The British Real Estate Investment Trust Presents Interesting Options
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.
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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.Using a range of financial and investment criteria, BDO came up with a ranking which saw the sixth smallest real estate trust of the group – A&J Mucklow Group plc (LON:MKLW) – rated number one. With a market cap of £221.6 million, this long-established property investor – founded in 1933 and first listed on the LSE in 1966 – has a portfolio of industrial, office and retail property across the Greater Midlands. And with, according to BDO, ‘over 40 years’ of unbroken dividend payments’,Mucklow Group’s first place reflected its solid performance in all seven criteria, without topping any of them.
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.
Offshore Interests of UK REITs
For investors interested in diversifying into a stake in commercial real estate beyond the British Isles, three of the 20 UK REITs offer that option. The largest in market cap terms is Hamerson plc (LON: HMSO – £3.53 billion), which operates shopping centres and retail parks across the UK but also in France. Next in size is SEGRO plc (LON:SGRO – £1.83 billion) a real estate trust which focuses on industrial and logistics holdings in outer London and the South-East but also in France, Germany, the Benelux countries, Italy, Poland and the Czech Republic. And Hansteen Holdings plc (LON: HSTN – £512 million), an investor in industrial properties, has 66 percent of its holding in various locations in Germany.
Little Interest in Residential
Leaving aside Land Securities’ stake in the hotel business, few of the UK REITs have to this point shown much interest in accommodation, especially residential. Shaftesbury plc (LON: SHB – market cap £1.42 billion) – another real estate trust to invest exclusively in London, and in its case specifically the West End – reports on its website that 11 percent of its income comes from apartment blocks, versus 38 percent for retail, almost as much (35 percent) from restaurants and the balance of 16 percent from office space. London & Stamford Property plc (LON: LSP – £606 million) lists four residential properties in central London, including a complex of upmarket apartments and penthouses in what was the north stand at Highbury Stadium, erstwhile home of Arsenal football club.But beyond these modest portions of British real estate held by UK REITs, the residential market has hardly been touched in the albeit brief life to date of this particular investment vehicle.Given the anaemic state of the UK housing market – beyond Inner London – the lack of investment is hardly surprising. But that may be set to change, as the government presses on with incentivising more bank participation via ‘Funding for Lending’ and related initiatives. It could also very much be argued that now would be the perfect time for a Real Estate Investment Trust to capitalise on stagnating prices in the UK residential sector. In the US, REITs have been active in hoovering up residential portfolios in the distressed property market.
Student Let REITs?
And there is a particular sub-sector of residential which has seemingly defied the general housing slump and which, arguably, lends itself in particular to REIT status.
This is private sector investment in tertiary student accommodation, which, as our in-depth analysis of last July reported Student Lets – A Hot Investment Item, has come from nowhere to be a multi-billion pound industry in just a few short years. As we flagged, a downside for the ordinary investor in student let investment is the relative illiquidity of the product – unless and until the emergence of a dedicated market in the product, the purchaser of a ‘pod’ in a new dormitory has unclear exit options should the need arise. Securitisation of student let investment via REIT status for the holding/management entity would seem to be an obvious way to go.
The relaxation since last year of the rules for that status – especially the availability of AIM and other second-tier exchanges and removal of the two percent (of book value) registration fee – is doubtless encouraging existing investment companies in both student and general multiple-occupancy housing to take a close look at the Real Estate Investment Trust route.
Other Specialty Areas
As already noted, office and retail properties dominate the UK REIT scene to this early point in its existence. In addition to accommodation, there are a couple of other specialised foci of encumbent REITs which perhaps have room to expand.A case in point is Big Yellow Group plc (LON: BYG), which the market values at £479 million and which is exclusively focused on self-storage, with most of its properties within the London Orbital. Then there’s Primary Health Properties plc (LON: PHP – £258 million), whose founder Harry Hyman had the bright idea in 1994 to start buying up and leasing back the medical centres of GPs and related providers to the UK’s National Health Service. The company has interests in towns across the UK though with a primary concentration – a third of the total – in the South-East. And finally, a pure retail play – including food and non-food – could be had via either the previously mentioned Local Shopping REIT or New River Retail (LON: NRR – £62 million).
With each of these specialised areas of real estate investment, it’s apparent that the existing players have barely scratched the surface of much larger potential markets, either in geographic terms or in natural extensions to existing property types. ‘Potential’ is used advisedly though, because going into 2013 a still very sluggish – in some respects moribund – UK property market will be no place for poor decision-making.
UK REITs – Onwards and Upwards?
Still, and although it’s still early days, real estate investment trusts look to have come of age in the UK. Crucially, most which were up and running when the global financial crisis picked up steam in 2008 –barely a year after the birth of the first eight UK REITs, are still going and going strong. Of itself, that’s a very positive sign for the future.
The cautious investor may yet conclude that REITs need more time – and observation – before a position is taken in this interesting investment alternative. By this time next year, we’d hope to be able to report that such reservations have mostly been overcome, that there’ve been several REIT IPOs, and that they’ve become an accepted division of mainstream investment in the UK.