Real estate investment trusts (REITs) have been dropping like flies this year, as competitors increasingly pursue mergers to grow their size, and many have begun to speculate about which one might be next to go.
The largest merger of the year was LXI REIT, which was bought out by Londonmetric Property at the start of the year for £1.7bn.
Others have included UK Commercial Property REIT (merged with Tritax Big Box), Balanced Commercial Property Trust, and Tritax EuroBox.
Meanwhile, a variety of REITs have either shuttered or begun the process of winding down, like Abrdn European Logistics Income, Abrdn Property Income Trust, Real Estate Credit Investments, and Home REIT.
Despite these constant mergers and shutdowns, the REIT market has actually been on the up-and-up.
“The mood in the REIT market has drastically changed in the past few months following a bleak couple of years which saw a peak to trough index drawdown of -45 per cent,” explained Justin Bell, director of sales at Deutsche Numis.
REITs have begun to take in new money again over the last year, with Segro kicking off the trend with a £900m equity raise in February. Since then, £1.6bn has been raised in primary equity issuance across eight different trusts.
However, Bell explained that the market is increasingly split between the ‘haves’ that have raised new money and seen their stock price shoot up, and the smaller, externally-managed ‘have nots’.
In total this year, there has been £2.5bn of equity issuance, £3bn of mergers and £2bn of take-private deals. These numbers are all up radically from 2023, where there was £600m of equity issuance, £200m in mergers and £1.1bn in take-privates.
Bell also pointed to the recent activity of shareholders in PRS REIT in their campaign to remove the chair and add new directors to its board, which subsequently led to a sales process kicking off.
“This activist playbook could well be seen elsewhere where discounts are persistent and misaligned incentives between manager, board and shareholders perhaps make M&A harder to unlock from the outside,” he said.
“There are still many weary shareholders in the sector, frustrated by discounts and performance; hence we have seen recent take-private deals take place below net asset value but still delivering significant uplifts to shareholders vs undisturbed prices.”
Bell then highlighted five REITs primed to be taken over:
Warehouse REIT: Trading 30 per cent below the value of its underlying assets, this trust’s sector of multi-let industrial is undergoing a “long-term resurgance”. The trust is seemingly close to selling off some retail warehouse assets, which could release cash back to its coffers, but markets still seem lukewarm on its prospects.
Urban Logistics REIT: After a failed merger with Abrdn Property Income in March, this trust is still trading at a 26 per cent discount, which Bell said looks “attractive given the continued tailwinds to the last-mile sector”. With multiple large REITs voicing their desire to increase exposure to urban logistics, an offer from either would not be surprising.
Picton: A year ago, Picton made a failed merger attempt with UK Commercial Property REIT, and its chair Lena Wilson is stepping down in January. This has left the trust vulnerable to corporate action with its “good, well-located portfolio of assets which is being undervalued by the market,” said Bell.
Schroder Real Estate: The trust has a 62 per cent exposure to the strongly performing industrial and retail warehouse sectors. In September, Witan sold a 4.9 per cent stake in the company, just below the five per cent threshold for reporting. “This leaves whoever bought the shares with a significant stake but without having to reveal their identity which is further fuelling speculation of possible corporate action,” said Bell.
Life Sciences REIT: While the trust’s shares have rallied 25 per cent in the last month, it still trades at nearly half the value of its underlying assets. The trust’s chair said in its results last month that the board was evaluating “a variety of options” to maximise value for shareholders, fuelling speculation of a potential sale.
Bell also speculated that more large mergers could come to fruition in the future, such as between Land Securities Group and British Land, Primary Health Properties and Avangrid, or Derwent London and Great Portland Estates.
“None would be surprising to see but safe to say if was easy it would have happened long ago in many cases,” he said.
He also noted that Custodian Property Income REIT has recently been “vocal of their desire to seek merger targets and should be an attractive acquirer to shareholders stuck in smaller diversified strategies”.
The trust’s income-focused strategy should appeal to shareholders as its peer group continues to shrink, he added.