The headline numbers reported by real estate investment trusts (REITs) make for scary reading. NAV down 13.9% at AEW UK REIT in the final quarter of 2022, 21.5% at UK Commercial Property REIT, and several others posting similar declines.
These falls (and more) were widely anticipated and priced into most companies late last year at peak Truss-Kwarteng volatility. Despite the recent NAV falls, most are still trading on discounts of 20% to 30%. The question now is what is the nadir point and when will we reach it?
Having spoken to a number of managers, the consensus seems to be the middle of this year. How much further values have to fall is more difficult to predict.
Encouraging inflation data for January, in which CPI slowed from a year-on-year 10.5% to 10.1%, adds to the rhetoric that we are passed peak inflation and with it the need for further central bank tightening.
Looking at the data from the various value houses and MSCI also makes for positive reading. The CBRE monthly index showed capital values in the UK fell by just 0.4% in January, following a trend of a slowing rate of decline in the final months of 2022 (from 6.8% in October and 5.5% in November to 3% in December).
Of course, the levelling off of values may just be a reflection of a lack of transaction activity rather than the trough being reached, and when transactions resume a clearer view of market pricing will emerge.
There have been promising signs in what little investment activity there has been so far this year, however. Although on the small side, Palace Capital this week sold an industrial property in Plymouth for £3.2m, marginally ahead of the 30 September 2022 book value and only 2.6% below the 31 March 2022 book value. Interim executive chairman Steven Owen said there were “encouraging signs of stabilisation in asset pricing in the commercial real estate market”.
This sentiment was repeated by SEGRO in annual results released today. The logistics sector, where values have fallen the most across the commercial real estate sector due to their historically low yields, is in an interesting place.
The structural drivers of occupational demand and limited supply persist, which is positive for further rental value growth. These fundamentals should entice investors back to the sector once there is more clarity over the interest rate trajectory.
Having seen values hit hardest (SEGRO reported its best-in-class portfolio lost almost 20% in value in the second half of 2022), the industrial and logistics sector is where I see most value.
Tritax Big Box REIT has recently posted a 19% drop in NAV in 2022, but still trades on a discount of 25.6% (at 8 March 2023). Urban Logistics REIT’s financial year ends on 31 March 2023, so we will have to wait until around June to find out the impact on its values. It is currently trading on a 24.8% discount to its September 2022 NAV. SEGRO is still trading on a double-digit discount to its re-rated NAV.
Some of the generalist REITs have substantial weightings to the industrial and logistics sector and languish on large discounts to NAV. For instance, UK Commercial Property REIT (which has a 59% exposure to the sector) still trades on a 30%-plus discount to its re-rated NAV.
Having seen large declines last year, values seem to be stabilising and point to a positive second half of the year for property – barring further political and economic events.