Two deals this week featuring a US private equity titan are signals that commercial property is turning from a no-go zone into an area of interest for UK investors on the hunt for a bargain.
Behind this change of perception are trends such as the ‘hotel-ification’ of offices to provide a level of nine-to-five comfort that’s curbing the appeal of working from home.
There’s also the growing recognition that less glamorous industrial buildings could be the source of handsome returns.
Blackstone, the US private equity player – which is amassing a $100billion property empire in Britain – has said it may bid for Big Yellow, the UK’s largest self-storage name. Big Yellow, a £1.9billion company known for its vibrant warehouses, is seen as the jewel in its sector. Shares in the firm leapt by 20 per cent following the news.
The intervention of Blackstone, the world’s largest commercial property investor, is significant, says Andrew Saunders of Shore Capital. He explains: ‘When a private equity group turns acquisitive, it suggests that valuations are low and that there are opportunities for improving returns. It’s a sweet spot.’
Saunders argues that, in some cases, it is possible to pick up £1 of good commercial property assets for 50p.
Bullish: Hammerson’s portfolio encompasses Brent Cross and the Bullring in Birmingham (pictured above)
This is the result of the widening of the ‘discount’, or gap, between the share prices of some real estate investment trusts (Reits) and their net asset values (NAVs).
The cause of the slump in the shares were higher interest rates that made Reits a less attractive proposition and economic uncertainty. Yet, even against this background, Blackstone went shopping, snapping up Warehouse Reit in the summer.
As was also announced on Monday, the private equity group is now selling £1billion of warehouses to Tritax Big Box, in return for a 9 per cent stake in this £3.65billion Reit.
In Blackstone’s view, Tritax Big Box owns ‘high-quality properties with meaningful embedded rental growth potential’. But its shares are at a 25 per cent discount.
This reflects the despondency that has surrounded Reits, but also a degree of fear that the Budget could contain measures inimical to commercial property. If these materialise, Blackstone may walk away from Big Yellow.
But this apprehension means that Reits are not only themselves bargains, but can also find undervalued buys.
Laura Elkin, manager of the AEW UK Reit, said: ‘Political instability is producing mis-pricing right now. There are lots of attractively priced opportunities.’ Many private investors are looking to diversify.
If you feel this is the right time to make Reits a building block of your portfolio, this is how to lay some foundations.
SHELTER IN SHEDS
Blackstone may be keen on Big Yellow, which operates about 80 units in London and the South East.
But fund managers such as Matthew Norris of Gravis and Alan Dobbie of Rathbone, who are long-term backers of Big Yellow, are determined the business will not be sold on the cheap. A figure of £2.7billion is regarded as a reasonable valuation, given the credentials of Big Yellow’s chairman Nicholas Vetch and chief executive James Gibson.
Dobbie says the duo have built the business ‘painstakingly’ in the face of planning and other difficulties. Norris cites the pulling power of the Big Yellow brand. He adds: ‘Potential customers don’t Google self-storage, they Google Big Yellow.’
A bidding war for Big Yellow could loom, especially since brokers Peel Hunt think the US Reits CubeSmart and Extra Space Storage may be interested.
Even before this talk began, brokers rated Big Yellow a ‘buy’. The shares stand at 1118p, which implies a discount of about 25 per cent. One broker has set a target price of 1530p. Tritax Big Box is also rated a ‘buy’ at the current 145p. One broker has set a target of 200p. This reflects the reassessment of this Reit.
And, as this column highlighted last month, Tritax Big Box is moving into data centres – the edifices powering the artificial intelligence (AI) boom. If the Reit’s project on the Manor Farm site close to Heathrow gets the go-ahead, the Reit could earn £59m in rents every year.
Does Blackstone’s ambitions extend to the acquisition of the entirety of Tritax Big Box?
It’s always possible, but if you want exposure to this and other Reits including LondonMetric and Primary Health Properties, one option is the TM Gravis UK Listed Property fund, a FundCalibre best-buy.
AT HOME IN THE OFFICE
‘Hotel-ification’ is the buzzword in the London office market as demand for deluxe HQ accommodation in the West End outstrips supply. These workplaces boast five-star hotel-like decor, with swish furniture and well-stocked kitchens.
These extras – which help ensure that staff return to the office for four or five days-a-week – are not an extravagance.
Norris argues that ‘hotel-ification’ should be good news for such Reits as Derwent, Great Portland Estates and Shaftesbury Estate, which owns swathes of Covent Garden and Soho.
These Reits are also at deep-ish discounts. But this did not deter the £1.5 trillion Norwegian wealth fund from taking a large stake in Shaftesbury in March, hinting that these are good long-term bets for investors on a somewhat smaller budget.
The return to the office should also boost British Land, owner of the Broadgate complex in the City. If you are an existing holder, your patience could be rewarded.
TAKE RETAIL THERAPY
Such has been the attrition in the High Street that retail property has been plunged into what Saunders calls ‘a nuclear winter’. But there is a sense that the disruption caused by e-commerce is plateauing and shoppers are embracing the sociability and other aspects of physical stores.
The beneficiaries of this shift could include the £1.6billion Hammerson group, whose portfolio encompasses Brent Cross and the Bullring in Birmingham (pictured above). Hammerson is rated a ‘hold’ by analysts.
Another option is the £302m NewRiver Reit, which specialises in local shopping centres and is rated a ‘buy’. NewRiver has a 9.7 per cent dividend yield.
The £169m AEW Reit is similarly generous, with a 7.49 per cent yield. This Reit’s discount of just 0.6 per cent is thanks to a strategy of refurbishing tired retail parks and then selling them at a profit, as well as faith in a brighter future for the High Street.
One of AEW’s recent buoyant High Street buys is the Bancroft Parade of shops in the Hertfordshire commuter town of Hitchin.
Tenants include Gail’s, the bakery chain which acts as a catalyst for footfall in retail locations. Reits could have the same effect on your portfolio, so long as you are ready for political risk.
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