Results season has been a depressingly gloomy affair over the last two or three years for property analysts, but a series of 2024 reports posted this week show that the clouds are parting and the light is starting to peer through for real estate.
In the main, 2024 was a very positive year for the sector. Logistics continues to be a top performer, with Tritax Big Box REIT reporting its highest annual returns since the heady days of 2021; retail appears to back in vogue after a decade in the doldrums, with West End landlord Shaftesbury Capital posting a 7.0% NAV total return; and even the much-maligned office sector is showing signs of a recovery at the top end, with Derwent London reporting stable values.
Operational performance had never really wilted over the past few years, with robust occupier demand and constrained supply leaving rental growth in positive territory. The crux of the problem has been with values.
When gilt yields ballooned in 2022, property investment yields took a similar path – to preserve the yield spread over the risk-free rate – and in turn property values tumbled.
The interest rate cutting cycle that started in August 2024 was supposed to be the turning point for the real estate sector, and indeed REIT share prices were showing positive momentum in the months following that first rate cut. That was kyboshed by the chancellor’s budget in October, however, which spooked markets and saw gilt yields return to their 2022 peaks for a short time.
Unfortunately, macroeconomic considerations are driving real estate share prices, and it would be foolish to try to second guess what is to come next after so many false dawns and new obstacles being thrown in.
Estimated rental value (ERV) growth outstripped the effects of outward yield movements at the three aforementioned companies, resulting in positive valuation gains for the trio.
Shaftesbury posted the largest uplift at 4.5% bringing its portfolio value to £5.0bn. This was driven by 7.7% ERV growth outweighing a 13 basis point outward yield movement.
Tritax Big Box’s portfolio value was up 3.7% over the year at £6.55bn, adjusting for the acquisition of UK Commercial Property REIT in the year. ERV was up 5.4% and the equivalent yield on its portfolio moved out 8 basis points to 5.68%.
The equivalent yield on office landlord and developer Derwent London’s portfolio moved out 18 basis points but was offset by 4.3% growth in ERV, which meant values were stable (+0.2%) at £5.0bn. The second half of the year was particularly interesting, with a static yield and rental gains wiping out the first half deficit.
These three examples operate at the larger end of the property sector, but there is some obvious read across to their smaller peers. Yields appear to have stabilised and rental growth remains strong across different sectors. I said I wasn’t going to second guess the macro, but dare I mention the possibility of yield compression?
That is an interesting point, because the sector is certainly at an inflexion point and the reason why private equity has been circling and M&A activity has heightened – much to my consternation.
So, the board of primary healthcare provider Assura should be commended for batting away a proposal to acquire it last week at a discount to its NAV. That has seen off one party in the bidding consortium (UK pension fund USS), but US private equity giant KKR has yet to reveal its hand (it has until 14 March to put up or shut up).
There have been far too many property companies and shareholders caving in to bids at the bottom of the market over the past two years (Tritax Big Box was the beneficiary in its acquisition of UK Commercial Property REIT last year), which makes absolutely no sense for shareholders. Real estate is a cyclical market and investors should treat it as such.
It will be interesting to see where Achilles Investment Company (the new activist investment trust that launched this week) will focus its attentions and what activism it will prescribe. The property sector is in the crosshairs and if it can give a jolt to some boards then that can only be a good thing. If nothing else, we start to see better communication from some boards that would be a start (although some boards are improving, while others have always been amenable).
Forcing portfolio sales to manufacture an exit does not seem very appealing, especially as the clouds appear to be parting.
