BREWIN DOLPHIN : REIT mergers point to more investible future for UK property – RBC Brewin Dolphin

10 February 2024

A series of mergers could make the UK's listed property companies a more investible proposition and help them compete on the global stage, according to wealth manager RBC Brewin Dolphin.

Tritax Big Box has agreed a merger with UK Commercial Property, creating the UK's fourth largest real estate investment trust (REIT)¹.

The news followed two major deals in January, with LondonMetric agreeing a £1.9 billion all-share merger to take over LXi and an all-share merger between Abrdn Property Income Trust with its larger peer Custodian Property Income REIT.

Analysts expect the mergers to be followed by others throughout the year, as more REITs and property companies adapt to higher interest rates and reassess their portfolios amid huge changes in the way property is used. Greater scale has also become more important for securing cheaper borrowing costs and widening the pool of potential investors.

Compared with international peers, the UK's REITs are relatively small with a combined market cap of £42.8 billion². Brookfield, one of the largest US-listed property asset managers, is valued at £52 billion alone³.

The mergers follow the closure of open-ended property funds last year. In October M&G announced it would wind down its M&G Property Portfolio, taking the assets under management held by these types of funds to just £3 billion - a considerable fall from a peak of £20.5 billion&⁴.

John Moore, senior investment manager at RBC Brewin Dolphin, said: "At their current scale, the UK's REITs are limited by their size - this has an effect on the capital they can attract, the terms on which they can borrow, and ultimately the deals they can do. Combine them all and you have just one of the main North American property asset managers - they simply can't compete on a global scale.

"There is a unique opportunity to invest in property, where the managers are taking self-help measures to reflect the amount of change in the sector. The closure of open-ended funds only adds to that and puts REITs in an even more interesting position. However, to take advantage of these trends, some REITs are having to raise substantial sums privately, which restricts them and means they can only invest £1 billion when, really, they should be talking about multiples of that figure.

"LondonMetric understands that and is trying to build scale so it can make the most of the period we are going through by buying cheap assets, building its portfolio, getting access to cheaper debt, delivering returns, then going back to step one and doing it all again, only bigger. Property is increasingly a scale business - the larger players will likely be the winners of the next few years.

"The LondonMetric-LXi deal puts pressure on the entire sector - two mergers have followed and more could be on the way. It is the start of something, and we should soon see more activity in the sector. A professional adviser will be able to guide you through these changes and structure a portfolio to take advantage of them."

Segro - John said: "Segro is a specialist property company that has built upon its Slough-based warehousing roots to develop into a leading international warehousing, distribution centre, and data centre business. Segro has exposure to growing areas of the economy, led by technology and fast-moving retail and has a strong balance sheet to fund its future potential."

LondonMetric - John said: "With the deal for LXi, LondonMetric is challenging the 'old guard' in the UK's property industry - namely Land Securities and British Land. It is now in a position to become the flagship property company, underpinned by a modern, balance portfolio of assets, positioned to benefit from the changes the sector is currently going through."

TR Property - John said: "TR Property is a popular investment trust that offers broad exposure to a range of real estate assets. It owns property directly, but also holds shares in REITs from across the UK and Europe and can be flexible between opportunities in either segment. Large UK property developers such as Land Securities are among its top holdings, alongside the likes of Klépierre, which is the second largest shopping mall operator on the continent."

iShares UK Property- John said: "If you want quick, cheap, and straightforward exposure to the UK property market, the iShares UK Property ETF could be an option. It tracks the performance of the UK's property companies, including Segro, Land Securities, British Land, and Tritax Big Box REIT. There are further passive options offering a more global view of property exposure too."

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NOTES TO EDITORS

About RBC Brewin Dolphin

RBC Brewin Dolphin is one of the UK and Ireland's leading wealth managers and traces its origins back to 1762. With £51.8* billion in assets under management, we offer award-winning, personalised wealth management services from bespoke, discretionary investment management to retirement planning and tax-efficient investing.

Our qualified investment managers and financial planners are based in 33 offices across the UK, Jersey and Republic of Ireland. They are committed to the most exacting standards of client service, with long-term thinking and absolute focus on our clients' needs at the core.

As part of Royal Bank of Canada (RBC), we are now able to draw on the strength of a global financial institution to continue to improve the service we provide to our clients and drive further innovation across our business.

*as at 31^st October 2023.

About RBC

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1. Source: https://reactnews.com/article/tritax-big-box-agrees-merger-to-create-4bn-titan/
2. Source: Refinitiv. Refers to REITs only and prices as of 23/01/2024
3. Source: Refinitiv. Based on a conversion of £1=$1.26.
4. Source: https://reactnews.com/article/and-then-there-were-four/