Picton Property: a deep-value property play

There has been a jump in takeover activity in the real-estate investment trust (Reit) sector over the past six months. Recently, Tritax Big Box Reit (LSE: BBOX) announced a £485 million takeover of Warehouse Reit (LSE: WHR), outbidding private-equity giant Blackstone. Under the terms of the deal, Warehouse’s shareholders will receive 0.4236 new Tritax shares and 47.2p in cash per share, plus upcoming Warehouse dividends due in July and October.

The deal will create a £7 billion giant and one of the largest single owners of warehouses in the UK. The deal followed what seems to be the final instalment of the battle between private-equity giant KKR and Primary Health Properties (LSE: PHP) over the latter’s peer Assura (LSE: AGR).

After months of negotiation, Assura has agreed to merge with PHP to create a £6 billion, predominantly healthcare-focused, property portfolio. Assura’s shareholders will receive 0.3865 new PHP shares and 12.5p in cash for each share, along with a special dividend of 0.84p. PHP’s offer values each Assura share at 55.0p, when including declared dividends, and values the company at roughly £1.79 billion.

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These deals have been driven by necessity as Reits strive to bulk up to remain independent. The synergies achieved from any deal are usually relatively small in comparison with 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.

Most analysts believe this trend will continue. Sub-£1 billion market capitalisation Reits are struggling to attract investors and are trading at deep discounts to net asset value (NAV). That makes it hard to raise capital and makes them appealing to private-equity buyers. For smaller, patient investors, there are currently some fantastic opportunities on the market, but these aren’t expected to last long as the sector continues to consolidate.

Picton Property: in safe hands

The £430 million Picton Property Income (LSE: PCTN) owns and actively manages a £723 million commercial-property portfolio, comprising 47 assets with roughly 350 occupiers across London and the southeast. At the end of the last financial year, its NAV was £533 million, or 100p per share, compared with the current share price of 81p. Unlike many other Reits, Picton is internally managed (rather than paying a fee to an outside third-party manager). Michael Morris is the current CEO and has held this position since 2012. He’s worked with the business since 2005 and during that time has seen multiple property cycles.

Over the past two years, like many other Reits, Picton has shifted away from office space as the post-pandemic return to the office has proved difficult. The group has rotated into industrial assets with the proceeds, as well as using cash to reduce debt.

In early 2024, the group sold its largest office asset, Angel Gate in central London, for £29.6 million, 5% ahead of the 31 December 2023 valuation of £28.1 million as a residential asset. After completion, the group’s exposure to office assets fell from 30% to 28% (it has since fallen to 25%). Office sales have totalled £51 million at an average premium to book value of 5%, although that’s off the back of several years of sub-par returns. In 2025, the value of the group’s office portfolio fell 5% on a like-for-like basis.

A shift into industry

Two-thirds of the group’s portfolio consists of industrial assets such as Parkbury industrial estate, Radlett (Picton’s largest asset), acquired in 2014, and River Way industrial estate, Harlow, acquired in 2006. In 2025, occupancy in this part of the portfolio was 99%. Demand is high for these assets because they are no longer being built.

Industrial parks are an integral part of the UK logistics network, but it takes years to push them through the planning system. As a result, demand is outpacing supply and is expected to continue to do so for the foreseeable future.

Across the company’s portfolio, 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. Picton has projected an estimated rental value (ERV) for the industrial portfolio at roughly 15% above current levels. Management expects to push through further rent rises as contracts come up for renewal.

Picton Property’s quality portfolio

Picton’s capital allocation strategy differs from many of its peers. Typically, a Reit must distribute at least 90% of its property income and profits to shareholders each year to retain its tax benefits, which usually leaves little money for other purposes. Picton has adopted a conservative approach that still meets this target. Its dividend cover has averaged 113% over the past three years.

It has used the remaining cash as well as income from property sales for debt repayments, select acquisitions and share buybacks. Last year, £11.8 million was invested in the portfolio to boost occupiers’ amenities and environmental credentials, while £0.5 million was spent on an industrial property close to an existing asset. Gearing was cut to 24%, with the remaining borrowing maturing in 2031 and 2032, with fixed interest rates averaging 3.7% (compared with the equivalent yield of 6.8% in the property portfolio). Picton has also announced a £17.5 million share buyback – a sensible capital allocation choice with the shares trading at such a deep discount to NAV.

Since 2020, UK Reits have had to navigate a challenging environment, but recent deals show deep-pocketed investors now see value in this downtrodden segment of the market. With its 4.7% yield, low level of gearing, a quality portfolio set for growth, and a discount to NAV, Picton is one of the better plays in the sector.

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