A lousy summer, an unsatisfactory conclusion to The Ashes, for us, wrapped up warm for the first day of the football season, and a job following the quoted real estate sector. Happy? Hmm…
So, rates up means REITs down, but the volatility over the past few months and indeed year has been like little else I’ve known. Mid-July and the CPI “print” shows inflation falling faster than the market anticipated. Sector is a sea of blue, with certain shares up 5% in the blink of an eye as UK interest rates are immediately forecast to peak at below 5%. Happy days! A few weeks on and the latest GDP numbers are released. The economy apparently rocketed, with the outturn being +0.2% better than the 0.1% economists had been forecasting. The sector falls 5% because interest rates are now being forecast to reach 6% at the peak. Trying to make much sense out of those intra-day movements has left me and many others not just depressed but very confused.
Just to give a sense of how confused, I posed a question in a note recently:
Name the company whose shares have, YTD, risen 20% in the first 6 weeks of the year before falling 21% by the end of the 1st quarter before rallying 18% in a month before falling 17% in 2 months, before rising 18% in a month, to being in freefall as I type in mid-August to be down 7%.
Nope, it’s not some highly indebted REIT exposed to tertiary shopping centres. Instead, it is Land Securities, a rather well-run REIT with a very strong balance sheet which has continued to let up its development programme at very satisfactory rents. Generally, it’s doing rather well.
What’s driving all this? The 5-year swap rate is the answer. The correlation between daily movements in the swap rate and what REIT share prices do has never been stronger. With the benchmark gilt – the 10-year – now yielding 4.7% and above the hiatus of Trussonomics, it’s little wonder that “shorting” the sector is, on occasion, like shooting fish in a barrel.
Bright spots? Well rather than burst out laughing, there are a few. The sector is only 5% down relative to the All Share Index. Cold comfort. Recent results, with the odd marginal outlier, from a range of REITs owning assets in a range of sectors, have shown broad unanimity with asset valuations in a narrow spread of +2% to -2% implying valuers are “on it!” At least for the moment.
High quality PBSA owner Unite raised £300m of fresh equity for debt repayment and development capex and it was very well supported even at a narrow 4% discount to the previous day’s closing price and just a 2% discount to NAV. Realty Inc, the huge US REIT, continues its UK buying spree relieving tiny quoted Ediston of its retail warehouse portfolio for a couple hundred million, possibly doing a slightly larger deal to buy similar assets from British Land. Capital & Regional is raising underwritten equity to buy a The Gyle shopping centre in Edinburgh. So, there is some activity out there!
Same as last month: “no one likes us, we don’t care.” Struggling on. My next commentary will be after the clocks gone back and it’s pitch black by 5.00pm. Ho hum…
