The great Reit fire sale – where to find the best value

The real-estate investment trust (Reit) segment of the UK equity market has been on life support for much of the past five years, and it’s easy to understand why investors have decided to give the sector such a wide berth.

The commercial real estate market was disproportionately hit by the pandemic and, just as the world was recovering, central banks began to hike interest rates to the highest levels in recent memory, jacking up the cost of borrowing. For a sector that typically requires easy-money conditions and had binged on cheap debt throughout the 2010s, this sudden change in interest rate policy delivered yet another unexpected shock to investors.

Reits are a diverse bunch and in reality many were able to navigate through these challenges without too much difficulty. But investors didn’t wait around. The sector’s difficult outlook, coupled with investors’ general desire to sell anything listed in London, heaped selling pressure on the shares.

MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

Investors have continued to avoid the sector despite a general recovery in the market, even though it’s becoming desperately clear the sector is deeply undervalued. That’s a fair statement to make as it is easier to determine the underlying value of Reits than of most other companies.

Determining what Reits are worth

Investors can either use the published net asset values, or use yield as a proxy for underlying cash flow to determine the value of Reits. A combination of both is probably the best strategy.

Net asset values (NAVs) are calculated using a range of factors, such as the transaction values of similar properties, possible returns and interest rates. However, ultimately, a property is only worth what another buyer is willing to pay for it.

This is where the yield comes into play. The vast majority of the total return from real estate over multiple decades is income. The value of the property can rise and fall, but the income is always there, so understanding how much income an asset can generate and the quality of that income is key. This in turn feeds back into the valuation of any asset.

Purpose-built properties with high-quality tenants on long-term inflation-linked leases are generally going to be worth much more (and maintain their value better) than smaller properties let to small shops on short-term leases.

Still, even those Reits with high-quality cash flows have struggled to attract investors’ attention recently. Take Picton Property Income, which owns and actively manages a £723 million commercial-property portfolio, comprising 47 assets with roughly 350 occupiers across London and the southeast.

Two-thirds of the group’s portfolio consists of industrial assets such as Parkbury industrial estate – occupancy here is 99% and demand for the space is so high that tenants are paying up to stay. It was able to push through rent rises of between 8% and nearly 40% last year, in situations where leases were coming up for renewal.

Despite these quality income streams, the trust is trading at a deep discount to its 100p per share net asset and buyers are taking notice. Over the past few years, Picton has sold a clutch of office properties at an average premium to book value of 5% and these weren’t even the company’s best assets. Picton now finds itself in a strange position.

It has an attractive portfolio of real estate generating attractive income streams that buyers are willing to pay a premium for and its gearing is low at 24%, with debt fixed at an interest rate of 3.7%, but the market doesn’t seem interested. One group of buyers, however, is taking notice.

Private equity pricks up its ears

Equity investors might not be interested in UK Reits, but corporate and private-equity buyers are both taking advantage of the opportunity. In mid-2022, there were 73 real-estate companies listed on the London Stock Exchange, according to figures compiled by the Association of Investment Companies (AIC).

In the three years since, 17 have been lost to mergers or deals that have taken the companies private; 14 have wound up or are winding up, or have put themselves up for sale, leaving just 42 listed companies – a decline of 42%.

Some of the sector’s largest players have moved to swallow up their smaller peers. The synergies achieved from any deal are usually relatively small in comparison to the values involved. Instead, Reits are seeking scale to fend off predators and reduce their cost of capital, as well as to appeal to a larger audience of investors.

Take LondonMetric (LSE: LMP). In the past three years, it has acquired three other Reits, including LXi Reit, Urban Logistics Reit and CT Property Trust. The deals have catapulted the trust into the FTSE 100, making it one of the UK’s largest corporate owners of UK real-estate property assets.

However, questions are now growing around the trust’s exposure to Merlin Entertainments, the private-equity-backed theme park operator. Merlin’s losses are spiralling, and 10% of LondonMetric’s rent roll is tied to its theme park assets. The market is watching this situation closely.

The other major consolidation deal in the sector this year was Primary Health Properties’ £1.8 billion acquisition of Assura. PHP outbid private-equity giant KKR and, assuming the merger clears the recently announced competition investigation, the deal will create a healthcare-focused behemoth with nearly £3 billion of assets.

Between them, the two groups generated rental income of £333 million last year, close to 85% of which is underpinned by revenues from the UK and Irish governments.

Private equity failed to crash PHP’s party, but that was the exception, not the rule. At the beginning of September, Blackstone emerged victorious in a months-long battle to take over Warehouse Reit after rival bidder Tritax Big Box Reit (LSE: BBOX) withdrew its offer.

Meanwhile, KKR has been in talks with build-to-rent provider PRS Reit, although PRS has now accepted an offer from another bidder. PRS owns the largest build-to-rent single-family home portfolio in the UK, with 5,443 completed homes as of 31 March 2025. The company put itself up for sale earlier this year following a strategic review.

PRS is a case study in what’s gone wrong in the UK market. Despite reporting near-full occupancy quarter after quarter, a consistent rent-collection rate of 100% and a steady dividend yield of 4%-5%, the stock has continued to trade at a discount of 20%-40% of the group’s net asset value.

Soon after it put itself up for sale, an offer emerged from Long Harbour (a property management firm) valuing it at 115p, or £631.6 million, around its current share price at the time, but still below the NAV at the end of December of 139.6p. In mid-September, the company announced it had agreed the sale of the PRS Reit Holding Company, its operating subsidiary that holds the entirety of the Reits portfolio of property assets for Waypoint Asset Management for £633.3 million after fees.

The company has said when the deal closes it will liquidate and return assets to shareholders as fast as possible.

Year-to-date, the Reit sector has traded at an average discount to NAV of 28%, while many buyout offers have come much closer to NAV. Such deals help justify the NAVs: they show the values presented are not overinflated or unrealistic. They are, in fact, an excellent gauge of what the private market is willing to pay for these assets.

They also show the vast gulf between private- and public-market views of the sector and its underlying assets. This suggests there’s an opportunity for investors who are willing to dig into the weeds to find the assets worth paying for in the sector.

Where to find the best value

As noted above, investors need to consider both the quality of a company’s portfolio income as well as the NAV when trying to determine how much one of these businesses could be worth.

Picton (LSE: PCTN) is a good example. The firm has a quality portfolio, and it’s been able to sell selected assets into the market at or around book value, justifying the portfolio’s overall NAV. Despite this, the stock is trading at a discount of around 25% to its 100p per share NAV value.

Analysts at Panmure Liberum believe this value could rise to 115p by 2028 thanks to rent increases across the portfolio and growth in asset values. The stock also yields 5% on a forward basis. Put all of those factors together, and the stock looks cheap.

The management agrees. Following its deployment of £17.3 million to buy back about 4.4% of its shares since January 2025, Picton recently announced a further buyback of up to £12.5 million – the best use of capital given where the shares are today.

By contrast, Regional Reit (LSE: RGL) faces a more uncertain outlook. The company is trading at a near-40% discount to NAV, with an 8% dividend yield, but its portfolio of mainly regional office buildings is only 78.6% occupied.

In the first half of the company’s financial year, it managed to push through rent increases of 4% on new lettings, which is positive, but it’s around half the rate of Picton’s, illustrating the supply/demand fundamentals of these two markets. Picton has also lost four tenants this year as they’ve upgraded their office space.

Regional is also having to invest millions upgrading the quality of its assets to meet government environmental standards and has a major debt maturity deadline in August 2026. So, while the shares might look cheap, it’s arguable that the business does deserve to trade at a discount considering its lower-quality portfolio and weaker balance sheet.

British Land (LSE: BLND) is another example of a Reit best avoided. Despite being one of the largest listed Reits in the UK, the group’s approach to asset management has left a lot to be desired.

Broker Panmure Liberum pulled no punches in its report on British Land’s full-year results published in May, noting group earnings per share hadn’t risen in a decade. It added: “Holding brand-new offices at yields of about 5% on the balance sheet isn’t doing much for beating your cost of capital over the medium term”.

The broker said the company would be better off selling older assets to fund new developments in the pipeline (as yet to be funded) rather than allowing debt to creep up as it has been doing. “We think the market will be in ‘wait and see’ mode,” the note signed off. Since this damning verdict, the shares have slumped, falling 17%.

One of the more interesting Reits in the sector, which tends to fly under the radar (mainly due to its size, which at £172 million puts it below the reach of most fund managers), is AEW Reit (LSE: AEWU). This trust is focused on finding undervalued assets. It likes to buy property with robust income streams, but with the potential for improvement either via development or renegotiating the lease.

The group is “sector agnostic”, so it can make trades in different areas of the market wherever it sees value. The market clearly appreciates this strategy as, despite the trust’s small size, it trades relatively close to net asset value, in contrast to the rest of the sector.

In June, AEW acquired Freemans Leisure Park, an 8.4-acre freehold site in the centre of Leicester, for £11.2 million, with a net initial yield of 10.6%. This in itself is a great deal and the team at AEW has plans to make the asset even more productive by utilising undeveloped land to build hotels and restaurants, introducing electric-vehicle charging and pushing through rent increases at upcoming rental reviews.

The company is hoping to replicate the success of a previous asset, Central Six Retail Park, Coventry, which it acquired for £16.4 million in November 2021, and sold part of in December last year for £26 million for an internal rate of return of 16%, excluding the remaining part of the retail park that AEW is holding onto.

The management is committed to a quarterly dividend of 2p per share (a yield of around 7.6% on the current share price), and the company’s balance sheet is relatively clean, with a debt-to-gross-asset-value ratio of 25% and a low fixed cost of debt of 2.959% until May 2027.

Profits in care homes

Target Healthcare (LSE: THRL) is worth considering for its unique exposure to a segment of the UK property market that’s generally overlooked.

The company owns and manages a portfolio of purpose-built care homes across the UK. At the end of June, it owned 93 assets worth around £1 billion. The issues in the UK social-care sector have been well publicised, and the scale of the problem was laid bare in a recent Knight Frank report, “Healthcare Development Opportunities”.

The report notes that, while the UK’s population of over-65s has grown by 20.7% over the past decade, the number of care-home beds has only risen by 2.9%. Virtually all of this supply has come from just one region, the West Midlands. Strip this region out of the data, and the number of care-home beds has declined.

Target has the size and scale to capitalise on this market dislocation. The management is actively and proactively managing the portfolio to achieve the best returns. It recently sold a property for £9.6 million at an 8% premium to book value and has renegotiated several leases where a tenant failed to pay the rent on time (less than 5% of the rent roll overall). Target managed to renegotiate these leases at a higher rate.

The majority of the leases agreed by the company are on inflation-linked, upward-only annual rent reviews, with a weighted average duration of nearly 26 years. This quality portfolio does not deserve the discount the market has currently assigned to the Reit. The shares are trading at a discount to NAV of around 20% and there’s also a dividend yield of 6% on offer.

PHP (LSE: PHP) has similar attractive qualities. While some investors have expressed concern about the company’s level of borrowing after the merger with peer Assura, the commercial logic of operating a large, diverse portfolio of healthcare assets remains compelling.

Most leases are inflation-linked and the income generated from the portfolio is effectively backstopped by the government. The enlarged group will also play a key role in the growth of the NHS estate and modernising the countrywide primary-care network.

Considering the quality of the income stream, PHP’s current discount to its 2026 projected net asset value of 109p per share looks unwarranted, especially considering the 7.6% dividend yield on offer.

A £1.3 billion pipeline of new developments

Now PRS is leaving the market, Grainger (LSE: GRI) is one of the best pure-play operators for investors to gain access to the build-to-rent residential property sector, with 11,000 rental homes. The group has just completed its transition from a standard corporation into a Reit, which means, under the Reit rules, the company must distribute 90% of its rental income every year.

In exchange, management expects the company will save as much as £15 million in corporate tax in the first year. Grainger says it will reinvest any unrestricted tax savings, and earnings are expected to jump by 25% in the current year, then 50% by fiscal 2029.

Part of this will come from the tax boost, but part will also come from property developments. The firm has a £1.3 billion pipeline of 4,500 homes and these are filling up as fast as the group can build them.

In March, the group launched The Kimmeridge, its flagship 150-home development and first built-to-rent scheme in Oxford. It filled all spaces in just seven months, five months ahead of schedule. Within a week Grainger also announced it had let 50% of the 132 build-to-rent homes in less than a month at its Seraphina Apartments development in Canning Town. The take up was “well ahead of expectations”, according to the company.

Across the rest of the existing portfolio, occupancy is sitting at 98%-99% and last year the group pushed through high single-digit percentage rent increases across the portfolio, thanks to the lack of supply and increased demand for rental properties across the UK. There are few if any other markets that have the ability to push through inflation-plus rent hikes in the same way.

Despite the quality of the company’s portfolio, it’s trading at a near-40% discount to its last reported NAV of 300p per share. The City has pencilled in a dividend per share of 9p a year by 2029 as the company’s growth and Reit transition pays off, implying a yield of around 5% by the end of the decade on the current share price.

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.