AEW UK REIT (AEWU), the most highly rated of the dwindling pool of London-listed property funds, continues to “monitor” the situation at Alternative Income REIT (AIRE) where talks on an acquisition broke down in April. 

“It is of regret to the AEW UK REIT board that this opportunity did not proceed to an agreed position,” said chair Robin Archibald noting that the inflation-linked income of a portfolio that AEW managers used to run was “complementary to the strong rental growth prospects” of AEWU. 

Since talks over AEWU’s indicative, non-binding all-share offer at a 3% discount to net asset value foundered, AIRE has received an improved 70p per share cash offer of £56.3m from Glenstone REIT, its largest shareholder, at 17% below NAV per share, which it believes is too low.  

Archibald said AEWU would “continue to monitor the AIRE situation and other corporate opportunities”. His comment came in annual results showing the £165m investor in smaller, higher-yielding properties remains focused on how to scale up its strategy as UK commercial real estate valuations trade close to their lowest level since launch 11 years ago. 

NAV per share per share slipped 1.4% from 110.11p to 108.38p in the year to 31 March (and down from 109p at the half-year stage at 30 September) with the fall into administration by car park operator NCP knocking the value of its Tanner Row property in central York, although the site remains operational and rent is being paid while alternative uses are explored. 

However, with 8p per share of covered dividends included, AEWU made a total underlying investment return of 5.69%. Shareholders saw a 5.5% return as the share price discount to NAV averaged at 3.5%, where it remains, despite a knock from the Iran war in the last month of the year that saw the shares briefly trade 8.5% below asset value. 

The eight REITs in the AIC UK Commercial property sector stand on an average 20.7% discount, with AEWU’s higher rating reflecting its stronger performance over 10 years with a total 143.4% total return versus the group average of just 24.7%.

At the financial year-end, AEWU had a portfolio of 34 properties with an average £6.3m lot size, occupancy of 92.6% from 131 tenants and £15.2m of cash. With its fully drawn £60m debt facility expiring in July next year, fund managers Laura Elkin and Henry Butt are in talks with lenders about a refinancing. This is not expected to materially alter the company’s earnings but as a prudent step AEWU this month took out a forward interest rate cap to limit the impact from a spike in the cost of borrowing to up to 2030.

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