UK REITs (real estate investment trusts) have faced a spate of troubled performances in recent years, but as market volatility has surged, a handful of managers are making the case for giving it another look.
The four main UK property investment trust sectors (commercial, healthcare, logistics and residential) have generally failed to keep up with the wider UK market over three, five and 10 years, according to data from FE Analytics.
In the past year, healthcare has barely outperformed the UK average, but residential and commercial property are both currently in the red.
Certainly, some property builds have been challenged in recent years, according to Gervais Williams, manager of the Premier Miton UK Multi-Cap Income fund.
“Look, no one in their right mind has built a new retail centre for the last 15 years,” he conceded. “With the rise of online shopping no one really looked at the market and said we need more shops.” Consequently, the available market has shrank significantly with many of the more fringe builds disappearing.
But on a headline level, Williams noted there’s still a lot to like, particularly as central bank policy has normalised, and inflation has proven significantly stickier.
“Let’s just assume inflation turns out to be more difficult, interest rates go up, uncertainty rises because they can’t pay their bills, and the overall impact is that inflation proves stickier,” he said.
See also: Inflation rise to 3.1% further complicates Bank of England meeting
This situation, he said, was not that dissimilar to the highly inflationary period of the 1970’s. “In that period, the two best performing types of companies, bar none, were gold companies and real estate companies,” Williams said.
On a headline level, real estate companies benefit from the fact that many have fixed borrowing for several years, insulating them from some volatility and maintaining a good income. This remains true even if many companies may already be a few years into their fixed borrowing.
On top of this, even if inflation rises, people will always have to pay their rent, which means some real estate companies could see top-line revenue growth, he argued.
Matthew Norris, head of real estate securities at Gravis Capital, added we are a “long way” from the lows of policy or central bank rates.
“How do you protect your capital against being eroded in an inflation environment? You buy something with index-linked revenue, such as real estate.
“I think a lot of investors or wealth managers are missing the opportunity for growth income, not fixed income.
“If you have a client looking for reliable, growing income, perhaps those in the deaccumulation phase of their life. I think REITs deserve a place in those portfolios,” Norris concluded.
He also pointed potential for REITs to serve as a hedge, particularly in a more uncertain global market.
Technology has dominated the market in recent years, but this year we have seen multiple short, sharp selloffs driven by whistleblower concerns over AI and the high concentration in some of the memory names.
See also: Stockmarket shaken by stark AI warnings and rolling oil crisis
“If you look back at the dot.com bubble, when it burst in March 2000, UK REITs outperformed the darlings of tech and delivered a positive return over the next decade,” Norris added.
Indeed, according to Gravis data, from the dot.com bubble’s peak the Nasdaq ultimately plunged 60%, while the UK property market surged the same amount.
He also argued that the allegations that the REIT market was a “sector in retreat” owing to the wave of M&A activity were somewhat overemphasised.
Firstly, the sector has not purely experienced consolidation this year, with nearly £700m new equity raised. Secondly, M&A activity was not necessarily a bad thing.
“In the years I’ve run this portfolio, 13 companies have been acquired,” he said. “Of those, seven have been public-to-public, meaning bigger vehicles, more liquidity and all that’s just better for shareholders.”
For a stock specific opportunity, Premier Miton’s Williams pointed to New River REIT, which focuses primarily on retail and leisure property.
While he acknowledged it suffered from the previously mentioned pullback in builds due to online shopping, the firm has largely emphasised the highest-quality locations, with good footfall.
“Now retailers are saying they want to expand, and New River can provide that, but it will say it will put the rents up.
“What I think you actually get from that is more sustained demand,” Williams said. This is arguably reflected in its performance, with the company surging 18.1% year to date, outpacing the FTSE All Share, according to FE fundinfo data.
See also: UK REITland: While M&A grabs the headlines, new issuance is the emerging story
