After Covid struck five years ago, several UK real-estate investment trusts (Reits) suspended or slashed their dividends.
There were dire predictions that demand for offices and shops would be so much weaker after the pandemic that payouts would never fully recover. But while real estate has been affected by changes in work and leisure, most Reits have seen their income hold up much better than feared.
The two big diversified Reits sum up the highs and lows. Land Securities paid out 45.55p per share in 2018/19, falling to 23.2p in 2019-2020. It should pay 40.5p this year. British Land fell from 31.47p to 15.04p; it’s now back to 23p.
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Yet share prices are mostly back to where they were in 2020 or even lower. This isn’t just true for the office sector, where one can understand why many investors remain cautious. It applies almost across the board, and the reasons why are clear.
UK Reits: are investors too bearish?
Higher interest rates since 2022 have pushed up the cost of debt used to fund most property deals and also increased the returns that investors can get elsewhere (eg, from government bonds). Hence commercial-property values have fallen, which means Reits are regularly announcing valuation write-downs. That never makes for good headlines, even if rents keep rolling in.
For a double whammy, higher yields elsewhere make the Reits’ own payouts look less compelling. Pre-Covid, Land Securities yielded about 4.5%, now it yields 7.5%. Over the same period, the 10-year gilt has gone from about 0.75% to 4.75%.
Still, look at recent updates and you wonder if investors are too bearish. Shaftesbury, which owns large swathes of London’s West End, reported a 7% net asset value total return for 2024. The shares are down 8% over 12 months. London office specialist Derwent reported stable values and solid leasing trends. It’s off 13% over the year. Logistics firms such as Segro, Tritax Big Box and LondonMetric – which were market darlings until early 2022 – reported okay results, yet the shares remain in the red. And so on. Tailwinds may be picking up, but they’ve yet to be noticed.
Except perhaps within the sector, where Reits are snapping each other up or being bought out by private equity. In the past month, KKR has bid for healthcare facilities group Assura, and Blackstone has bid for Warehouse Reit. Specialists clearly see some value in UK property, at least selectively.
Of course, they may be wrong – real estate is cyclical and in every cycle, experienced investors get big calls wrong. Indeed, the news that Land Securities now plans to sell £2 billion of offices to invest in residential property is hard to understand – selling cash-generating assets near a likely market-bottom to fund ambitious new developments for a completely different type of tenant under a government that is very keen to intervene in the housing sector feels like a bold move, and not necessarily what shareholders want. Still, at these levels and with news improving, the iShares UK Property ETF (LSE: IUKP) sector tracker looks like a promising contrarian play.
(Image credit: London Stock Exchange)
This article was first published in MoneyWeek’s magazine. Enjoy exclusive early access to news, opinion and analysis from our team of financial experts with a MoneyWeek subscription.
