What a difference a year makes. UK REITs have rallied 25% from their multi-year lows hit last October, as both circumstances and sentiment has improved.
A year ago, the 5-year swap rate was 4.60%. It’s now dropped to 3.6%. The Bank of England Bank Rate was 5.25% last October, with futures pricing in a decline to 4.5% by the summer of 2025. Now the Bank Rate is 5.0% and futures are pricing in a decline to nearer 3.75% by next summer. Entering Q4 2023, UK REITs were trading at a -32% discount to net asset values, today the discount is closer to -16%. The upside to consensus price targets for next generation real estate securities highlights a broadly similar discount gap.
What does the future hold for UK REITs?
“There are exciting times ahead,” comments Matthew Norris, manager of the VT Gravis UK Listed Property (PAIF) Fund. “Rents for many property types, such as build-to-rent, purpose-built student accommodation and urban logistics are growing nicely. The brake on speculative new developments triggered by the high inflationary period in 2022 and 2023 means that the supply of newly finished buildings remains constrained.
“Valuation yields for most property types have stabilised, with valuers reporting stable or improving investor sentiment – the exception being secondary offices. Listed valuations remain mostly attractive among the mega trends I’ve identified – ageing population, digitalisation, and generation rent – as evidence by SEGRO plc recently offering to acquire Tritax EuroBox plc (both holdings in the Fund). And the regulatory landscape has improved with synthetic cost disclosure beating a retreat.
“Against this improving background it wouldn’t be a surprise if more investors see the benefits of holding REITs, or indeed a fund of REITs, within a multi-asset portfolio.”
You can find out more about the VT Gravis UK Listed Property (PAIF) Fund, here and discover which six drivers Matt believes will prompt a further re-rating in the sector here.
* As measured by the FTSE EPRA NAREIT UK index
** As calculated by EPRA (European Public Real Estate Association)
*** As calculated by Bloomberg
**** Knight Frank Prime Yield Guide – August 2024. Savills Market in Minutes: UK Commercial, September 2024
