“What’s wrong with that?”
Buzzword of the year so far! The best is getting better, and the worst is getting worse. It applies to the assets and, to a lesser extent, the quoted sector. Driven by property fundamentals and impending legislation on environmental standards, we are experiencing a robust occupier market and a falling investment market. Not unique, but rare. In London offices, the demand for best-in-class space continues. One agent recently described it as a “race for space” with pre-lettings being announced on the dearth of environmentally friendly space and rising rents. £100 per sq. ft headlines in Baker Street and Victoria may now be the new norm.
Retail is defying the doomsters with the consumer proving resilient, for the moment. Prime centres are seeing rising occupancy and rental growth, albeit from seriously rebased lower levels. Successful retailers are expanding while purely online retailers are having a few problems. The logistics market is quieter with take-up falling by about 30%, but supply remains limited, and rents are “competitive” still.
“Oh yeah, hmm…”
All hunky dory – well, except for rising costs of borrowing, contagion-fear from collapsed and collapsing US banks, and the spectre of a credit crunch! The bifurcation is between those investors hoping that rates will roll over as inflation deflates, and those fearing a second wave of value write-downs as credit spreads widen further and inflation remains “sticky.” A sharp decline in capital values on the back of yields rising – or “expanding” as it’s now described – has so far been taken on the chin given balance sheets have been conservatively geared. The sector had already adjusted to this with shares collapsing in Q4 last year but remaining so-so this year. However, any hint of disappointment in numbers is brutally reflected in share prices. Landsec fine, shares up, British Land not fine, shares down 7% in the day at one point. It doesn’t quite feel like it, but the REIT sector has only under-performed the All Share Index by a couple of % this year, although it remains a marginalised sector in an increasingly marginalised UK market. With more questions than answers going forward, the sector is about as far from a “must have” as is possible for many fund managers.
Nonetheless, a bid from the mighty Blackstone – at a 40%+ premium to where industrious REIT shares were trading – showed, briefly, that someone thinks some shares and assets are going cheap. However, the lack of share price reaction in comparable asset class owners spoke volumes with Segro, Tritax, Warehouse REIT et al seeing shares go sideways rather than up on the announcement. Mr. Darwin’s theories continue to be witnessed. Civitas, an owner of social housing, received a bid at a 40% premium where its shares were trading, but at a meaningful discount to its NAV. Its board recommended acceptance of the offer, citing adverse sentiment against social housing owners that was unlikely to change in the short to medium term. Can’t argue with that…
“No one likes us, we don’t care”
Elsewhere the “tiddlers,” – those REITs with sub-£200m market capitalisations – are heading for the exit. Ediston has effectively put itself up for merger/takeover for its portfolio of retail warehouses, Circle Property is liquidating assets and returning capital to shareholders, and Palace Capital is doing the same. Does anyone care? To be honest, not greatly.
