QuotedData’s Real Estate Monthly Roundup – August 2024

August 2024

Winners and losers in July 2024

Best performing funds

It already feels a long time ago that Labour won a landslide election at the start of July, but this seems to have had a calming influence on the market. The long-awaited interest rate cut occurred at the start of August, but even before this, the average share price move amongst the listed property sector was +3.1%. Corporate activity was again the driver behind many of the largest share price gains, with European logistics landlord Tritax EuroBox revealing that it was in discussions with more potential suitors following initial interest from Brookfield. A conclusion to Balanced Commercial Property Trust’s strategic review seems to be close, with a bid still on the cards. European property securities trust TR Property posted a double-digit uplift in its share price, mirroring the performance of its portfolio companies during the month. Values were back trending upwards for many of the diversified REITs (see page 2), with AEW UK REIT (which also reported progress on dividend cover), Schroder REIT and Picton Property all seeing impressive share price gains. Capital & Regional continues to be the subject of takeover discussions, with a second party entering the fray (see page 3). Meanwhile, student specialist Unite Group raised £450m in a placing.

Worst performing funds

Office landlord Regional REIT saw another sizable drop in its share price following a dilutive £110.5m rights issue in June. The company now languishes on a monstrous discount to NAV of almost 80%. Real Estate Investors is in wind down mode and reduced its dividend to reflect lower earnings from its diminishing portfolio. Three other companies at various stages of winding up – Macau Property Opportunities, Palace Capital and Ground Rents Income Fund – also feature. The residual value of the latter’s portfolio continues to be negatively impacted by leasehold reforms, but in a much more buoyant environment, a flat NAV was enough to earn its  and Cuban property investor Ceiba Investments’ places in the table. Many other thinly traded real estate companies also made the worst performing funds table in July, reflecting the volatile nature of their share prices. This was the case for UK investor/developer Conygar Investment Company, and pan-African real estate investor and developer Grit Real Estate Income Group. Having staged a mini share price revival in the wake of its strategic review, in which it vowed to continue in its pursuit of development returns, London office developer Helical gave up those gains and now trades on a circa 35% discount to NAV.

Valuation moves

Source: Marten & Co

Corporate activity in June

Unite Group raised £450m in a placing, with the proceeds earmarked for a number of student accommodation acquisitions and development projects. A total of 49,686,114 new ordinary shares were placed, raising gross proceeds of £447m, with retail investors contributing an additional £3m. Shares were issued at a price of 900 pence, representing a discount of 2.6% to the prevailing closing price. The company expects to deploy the proceeds by the end of the year into the acquisition of seven income producing assets and to fund the development of five new projects.

Sirius Real Estate raised £150m in a capital raise. In all, 159,574,468 new ordinary shares were placed representing 11.8% of shares prior to the capital raising. The issue price of 94p represents a discount of 3.5% to the prevailing closing share price, but is in line with the company’s adjusted NAV per share as at 31 March 2024. The capital raise will enable the company to execute on its ongoing acquisition strategy in Germany and the UK, with a pipeline worth almost £160m.

Private equity company Praxis Group announced that it was in the early stages of considering a cash offer for shopping centre owner Capital & Regional. Meanwhile, NewRiver REIT was given extra time in its negotiations to acquire Capital & Regional. It initially expressed an interest in the company in June and has since received two extensions to its deadline to firm up an offer. NewRiver and Praxis have until 15 and 16 August respectively to firm up their intentions.

The board of Home REIT proposed a managed wind down of the company after failing to secure a refinancing of its debt facility. That loan facility with Scottish Widows, which totals £114.6m, will need to be repaid by the end of the year – all the while incurring a charge on the outstanding amount of 7%. Once repaid through the proceeds of portfolio sales, the remaining portfolio will be valued at around £200m (depending on values achieved in the sales process). This, the company said, (coupled with the requirement for capital expenditure to drive an increase in rental value and valuation of the remaining portfolio) means that the only viable option would be a managed wind down of the company. The board said assets would be sold with the objectives of optimising remaining shareholder value and repaying the company’s loan balance.

Supermarket Income REIT completed a £170m debt refinancing through a private placement debt issuance and a new unsecured bank facility. The company has signed an agreement with a group of institutional investors for a private placement of €83m of new senior unsecured notes, which have a maturity of seven years and a fixed rate coupon of 4.44%. Proceeds will be used to refinance euro drawings under an existing secured revolving credit facility with HSBC, which had been used to fund the recent acquisition of a portfolio of 17 stores from Carrefour. The company also refinanced its existing £97m secured debt facility with Deka through a new £100m unsecured debt facility with ING Bank N.V. The new facility comprises a £75m term loan and a £25m revolving credit facility. The interest-only facility has a maturity of three years and has two one-year extension options at the lender’s discretion. The facility is priced at a margin of 1.55% over SONIA and benefits from forward starting hedges, which cap the interest rate at an all-in cost of 3.0% until January 2026. Following the debt refinancing, the company has a pro-forma LTV of 37%.

Tritax EuroBox announced that discussions with potential buyers of the business were ongoing, while Brookfield Asset Management has been granted an extension to announce a firm intention to make an offer to 26 August.

July’s major news stories – from our website

• Hammerson makes cut-price £1.5bn outlet centre sale

Hammerson sold its stake in retail outlets business Value Retail for £1.5bn, generating net cash proceeds of £600m. The disposal price represented an exit cash yield of 3.4% but was a 24% discount to its gross value of £2.0bn. The company intends to use the sales proceeds to pay down debt, reinvesting into assets at higher yields, and to fund a £140m share buyback programme.

• SEGRO completes €327m Italian job

SEGRO sold a portfolio of four logistics warehouses in Italy for €327m. The warehouses, in Milan and Rome, were developed by Vailog SEGRO and are fully leased to three tenants active in the online and traditional retail sectors.

• Balanced Commercial Property Trust completes office sell-off

Balanced Commercial Property Trust sold three offices, 17A Curzon Street and 7 Birchin Lane, in London, and 82 King Street in Manchester, rounding off its office sell-off. The company has sold seven offices since December 2023 for a total of £129.5m at an average discount of 4.1% to the then-preceding valuations. These sales reduce its exposure to offices to 16.0% by capital value, down from 29.6% as at June 2023.

• LondonMetric disposes of non-core property

LondonMetric Property sold five office and retail properties, in separate transactions, for £26.7m, reflecting a 6% profit over 31 March 2024 book values. They comprise a convenience-led retail asset in Weymouth for £14.3m, an office in High Wycombe for £3.9m, an office in Halesowen and adjacent land for £3.2m, a drive-thru site in Birstall for £4.1m, and a high street retail unit in Kingston for £1.2m.

• NewRiver REIT expands capital partnerships business with Ellandi buy

NewRiver REIT acquired asset management business Ellandi Management for £5m. The Ellandi business brings with it a portfolio of 16 shopping centre asset management mandates, which boosts NewRiver’s capital partnerships business to £1.5bn across a portfolio of 21 shopping centres and 18 retail parks.

• Impact Healthcare REIT sells five homes for £8.8m

Impact Healthcare REIT sold five care homes for £8.8m, in line with the latest valuation. Three, located in East Yorkshire, were sold for £4.3m, while two Welsh asset were sold for £4.5m.

• Harworth sells residential land to Taylor Wimpey

Harworth Group completed the sale of 15.6 acres of serviced residential land at its Stopes Road development near Little Lever in Bolton, to Taylor Wimpey for £8.5m.

• Grainger recycles out of London and into Manchester

Grainger acquired a 135-home build-to-rent scheme in Manchester for £31m from M&G Real Estate. The Astley is located in Manchester’s Northern Quarter and adds to Grainger’s existing cluster of 1,700 rental homes in the region. The acquisition was supported by Grainger’s ongoing asset recycling programme, following a £27m sale in London.

• AEW UK REIT disposes of industrial estate

AEW UK REIT sold Oak Park Industrial Estate, Droitwich for £6.3m, reflecting a net initial yield of 7.95% and a 33% premium to the March 2024 valuation.

• Workspace sells resi conversion asset at premium

Workspace Group sold The Planets, a residential redevelopment site in Woking, for £13.0m – an 18% premium to the March 2024 valuation. The site was part of the McKay portfolio acquired in May 2022 and received planning consent for 366 residential units in November 2022.

Managers views

A collation of recent insights on real estate sectors taken from the comments made by chairmen and investment managers of real estate companies – have a read and make your own minds up. Please remember that nothing in this note is designed to encourage you to buy or sell any of the companies mentioned.

Diversified

Balanced Commercial Property Trust – Richard Kirby, fund manager:

The second quarter of 2024 saw the economic pressures that have weighed heavily on the real estate sector begin to ease. Against this more positive backdrop, the MSCI Monthly Index delivered a total return of 1.7%, the joint strongest quarterly return since June 2022. This has been driven by an income return of 1.5% led by occupational markets. Over the quarter, all sectors delivered rental value growth, which was 0.8% at the market level, whilst vacancy rates remained broadly stable at 10.4%. The MSCI Monthly Index reported capital growth of 0.2% over the quarter, with April 2024 seeing the end of an 11-month run of consecutive valuation declines at the market level.

Rebased pricing combined with resilient occupational markets is beginning to translate into increasing investor confidence. This is particularly true of the retail warehousing and industrial & logistics sectors, where strong occupational fundamentals are supportive of income resilience and growth. The most notable feature of the investment market continues to be a constrained supply of available stock within these favoured sectors, with preliminary volumes for H1 2024 down circa 10% against already weak comparatives from H1 2023.

With the exception of offices, all other sectors have delivered positive total returns over the quarter. While the hybrid working model appears to have stabilised, the office sector continues to suffer from weakening investor confidence as occupational markets remain uncertain and obsolescence continues to pose an existential threat to secondary assets.

Logistics

SEGRO – David Sleath, chief executive:

Urban warehouses located in Europe’s largest cities and big box warehouses located in major logistics hubs and along key transportation corridors are in high demand from occupiers, driven by the long-term structural drivers at play in our sector – digitalisation, supply-chain resilience, urbanisation and sustainability. There is a shortage of modern, sustainable space due to low availability of land, restrictive planning policies and, more recently, a significant fall in speculative construction starts across Europe. This tight supply-demand dynamic combined with an improving macroeconomic situation will support higher take-up levels and help to drive continued rental growth.

Asset values appear to be at an inflection point in the UK and bottoming out in Continental Europe, and the prospect of interest rate cuts later in the second half should provide support for continued recovery in investment market conditions. We believe this will present further, exciting opportunities to drive future returns. Overall, we believe the present market environment offers an attractive opportunity for profitable medium-term investment.

Retail

Shaftesbury Capital – Ian Hawksworth, chief executive:

The investment market has been active for some time demonstrating demand for high quality prime central London real estate. Transactional evidence is now being reflected in more stable valuation yields and rental growth is delivering improved valuations and income. The occupational market in the core West End is strong and has been improving for some time.

Both the occupational and investment markets continue to demonstrate polarisation of demand to the strongest locations, as retailers become ever more discerning on a growing number of criteria. There is greater emphasis on global locations, consumer experience and service together with better digital engagement. Retail demand is strong, with units attracting interest from multiple customers. Our portfolio remains a preferred destination for market entry and retail expansion. Trading conditions are positive with excellent performance in certain categories.

Student Accomodation

Unite Group- Joe Lister, chief executive:

Structural factors continue to drive a growing supply/demand imbalance for student accommodation. Demographic growth will see the population of UK 18-year-olds increase by 124,000 (16%) by 2030 (source: ONS). Application rates to university have also grown significantly over the long term, reflecting the value young adults place on a higher level of education and the life experience and opportunities it offers. Strong wage growth in recent years has seen graduate earnings keep pace with inflation at a time when tuition fees have been frozen for seven years, supporting the overall attractiveness of a university education. Undergraduate applications for the 2024/25 academic year are encouraging, with application rates for UK school leavers meaningfully ahead of pre-Covid levels and robust demand from international students, particularly China and India. Applications to high-tariff universities, to which the Group is aligned, have grown 15% since before the pandemic, significantly outperforming the wider sector.

The supply of student accommodation cannot keep pace with student demand and many university cities are already facing housing shortages, which are particularly acute for the strongest universities where our investment is focused. Private landlords are leaving the sector at pace in response to rising costs from higher mortgage rates and increasing regulation, such as EPC certification and local authority licencing schemes. Since 2021, there has been an 8% reduction in the number of HMOs in England (source: Department of Housing, Communities and Local Government), equivalent to 100,000-150,000 fewer beds available for students to rent.

New supply of purpose-built student accommodation (PBSA) is also down 60% on pre-pandemic levels, reflecting viability challenges created by higher build and funding costs. In many markets, property valuations are now below replacement costs, further constraining new supply. Once allowance is made for first generation university-owned beds leaving the market each year through obsolescence, we expect to see almost no growth in PBSA supply in the near term.

The combination of these factors has significantly increased demand for our product in many cities and we expect this trend to continue for a number of years.

Healthcare

Primary Health Properties – Mark Davies, chief executive:

The commercial property market continues to be impacted by economic turbulence and the uncertainty of interest rates continues to weigh on the real estate sector. This is severely impacting liquidity across the wider real estate market especially those sub-sectors impacted by changing behaviours such as offices and retail. Conversely, structurally supported sectors such as healthcare and distribution where income security and rental growth are more assured are starting to see pricing stabilise.

We believe healthcare and in particular primary care real estate, remains a structurally supported sector and benefits from the demographic tailwinds of a population that is growing, ageing and suffering from increased chronic illnesses, which is placing a greater burden on healthcare systems in both the UK and Ireland which in turn compounds the need for both fit-for-purpose and additional space. However, future developments will now need a significant shift of between 20% to 30% in rental values to make them economically viable and we continue to actively engage with both the NHS, ICB and DV for higher rent settlements. Despite these negotiations typically becoming protracted, we are starting to see positive movement in some locations where the health system’s need for investment in new buildings is strongest such as our recent development at South Kilburn, London.

Primary care asset values have continued to perform well relative to mainstream commercial property due to recognition of the security of their government backed income, crucial role in providing sustainable healthcare infrastructure and more importantly a stronger rental growth outlook enabling attractive reversion over the course of long leases.

The continued lack of recent transactions in the year has resulted in valuers continuing to place reliance primarily on sentiment to arrive at fair values. Yields adopted by the Group’s valuers have moved out by 13bps to 5.18% as at 30 June 2024 (31 December 2023: 5.05%) to reflect perceived market sentiment for the sector. We believe further significant reductions in primary care values are likely to be limited with a stronger rental growth outlook offsetting the impact of any further yield expansion.

Real estate research notes

A result analysis note on Urban Logistics REIT (SHED). The company reported resilient performance in a rising interest rate environment, with its focus on growing earnings to provide dividend cover.

An annual overview note on Lar España Real Estate (LRE SM). Impressive rental growth allowed the company to declared the largest dividend in its 10-year history.

An annual overview note on Grit Real Estate Income Group (GR1T). Its latest act of corporate engineering has opened the door for new NAV and earnings accretive developments.

An update note on Tritax EuroBox (EBOX), which is sailing in calmer waters as demonstrated by a portfolio valuation that has changed little and a 30% uplift in earnings that now fully covers its 8.6%-yielding dividend.

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