The UK Real Estate Investment Trust (REIT) sector is undergoing a period of dramatic and seismic change. We have not witnessed this level of consolidation activity in the past. If true, recent comments from prominent industry observers indicate a wide range of mispricing in smaller REITs. The bigger players are gobbling up the benefits of this consolidation. Andrew Jones, co-founder and chief executive of Assura, noted that the number of quoted REITs on London’s bourse has halved since 2019. As is evident by this trend, investor preferences have clearly shifted in favor of larger and more concentrated investments.
Now, there are 19 such REITs in London, with market capitalizations of less than £1 billion. This shrinking segment raises questions about the viability of smaller firms in a marketplace increasingly demanding efficiency and substantial asset bases. Jones then pointed to the barriers that smaller REITs face. Concerning the small cap, he asked, “What’s the point of it? If you’re less than £1 billion and you’re externally managed then I don’t see where your future lies in the listed space.”
In this fast-changing market, the larger players are making well-timed, focused acquisitions that strengthen their positions. Interestingly, investor NewRiver REIT just this week defended its all-share takeover of Capital & Regional at £147 million. Similarly, Assura has made headlines with two significant purchases: Urban Logistics REIT for £700 million and Highcroft Investments for £44 million. These transactions are indicative of a broader trend where bigger REITs use their financial power to grab the most desirable assets.
In another bumper transaction, Unite Group announced that it was proceeding with its agreed takeover of Empiric Student Property at £723 million. This acquisition takes place against a backdrop of increased auction activity by larger, often national players to consolidate holdings and increase the quality of their portfolios. As the market is evolving, investors are rewarding firms that can show scale but a visible concentration on their business model and execution plan.
Assura’s recent action makes perfect sense in this larger landscape of consolidation. The firm’s cash flows are among the most predictable in existence, and for that reason, gives the firm an incredible moat against competition. Jones noticed that Assura’s shares were trading at a 21% discount to their net asset value (NAV). This was just before making public that KKR, a private equity firm, was interested. This substantial discount further illustrates the opportunity for investors to take advantage of undervalued, off-market assets in today’s competitive environment.
Another key player in this sector is Primary Health Properties (PHP). Earlier this month, it cemented its answers as the UK’s largest publicly traded healthcare landlord with a transformative acquisition. Chairman Harry Hyman said PHP had made a higher offer of £1.8 billion. This action has dramatically escalated competition within the sector even more.
That consolidation trend is very apparent in other big-name bids as well. KKR and Stonepeak just a month ago made a firm proposal to buy UK Commercial Property REIT. It was eventually taken over by Assura for £924 million. This latest acquisition is proof that bigger firms continue to build their stacks. They’re reshaping the competitive landscape of the UK REIT market.
Against this backdrop, experts are careful and reluctant to compare the UK market and increasingly similar moves in other countries. Simon French, chief economist at stockbroker Panmure Liberum, explained why this is so fraught with complexities. It’s naive to suppose that any of your mid-sized countries can suddenly imitate the way Donald Trump was able to change the rules of the game and change taxation.
The competitive landscape of the UK REIT sector is evolving rapidly. Whether it’s managing consolidation or adapting to moving investor gold posts, firms will continue to change and expand their investment strategies. The emphasis on scale and operational focus will continue, as firms look to improve their competitive position in the market.