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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
UK real estate companies and their investors have shooed away a few private equity bargain hunters this year. Executives think their firms are undervalued and are wary of “opportunistic” bidders. But if they want to remain independent, driving off acquirers is only half the battle: the onus is still on management teams to build a more attractive pitch for investors.
Blackstone had considered buying self-storage group Big Yellow, but walked away this month without making a bid. That followed a takeover battle for NHS landlord Assura that ended when shareholders voted to merge with listed rival PHP instead of taking a cash bid led by KKR.
These exceptions, however, are not enough to reverse the longer-term trend. The number of London-listed real estate investment trusts has fallen about 30 per cent over the past three years, according to London Stock Exchange data and Lex analysis. Unless something major changes, that pattern is likely to continue.
Many listed groups trade at such deep discounts to the reported worth of their buildings that bidders can offer a large premium to the share price and still pick up the assets below face value, making a quick paper profit even before thinking about future expansion. Blackstone’s £489mn takeover of Warehouse REIT represented a 43 per cent premium to Warehouse’s average share price in the three months before its first bid, but was still about 10 per cent below its net asset value.
What can real estate companies do to narrow this gap? Insisting that a market recovery is just around the corner doesn’t seem to be doing the trick. It has been seemingly imminent for ages now. Yet the FTSE EPRA Nareit UK index, which tracks British Reits, is practically flat this year, compared with a 17 per cent increase in the FTSE 350. It has underperformed the broader index on every time horizon since the inception of UK Reits in 2007. It’s no wonder generalist investors are wary of jumping in.
If Reits want to stay independent, they can’t just wait around for markets to lift everybody. Sure, external factors — from volatile gilt markets to war in Ukraine and Brexit — have made things harder over the past few years. But companies can still take steps to make themselves more attractive: executives at LondonMetric, for example, try to imitate US peers by paying quarterly dividends and emphasising earnings growth instead of just focusing on net asset values. It is not a coincidence that it is one of the only large UK Reits that trades close to book value.
Big Yellow may be pleased to see the back of Blackstone. But a share is only worth what someone is willing to pay for it. Management and their existing backers think the company is worth far more than Blackstone does; now they need to prove it.