Learning from the US

COMMENT For those of you that know me, you’ll be aware that I have a problem with sitting still, with being inactive. If I sit still for too long then I have to fight, really hard, not to nod off. Sitting still, for me, is not good. But sitting still in real estate may well be one of the best things you can do. There is a general feeling in real estate that you have to be hyperactive – buying, selling, asset managing, developing, refurbishing – if you want to justify earning the money. That you have to do that sexy stuff if you really want to call yourself a real estate player. Sitting back and collecting the rent was for those who couldn’t cut it in capital markets. But times have changed. Low interest rates and the introduction of REITs have dictated a new set of rules that allow you to sit back. To collect, compound and watch your yields compress. And that is what Realty Income – the newest US kid (well, a 50-year-old kid) to enter the UK – is doing. Enter the “monthly dividend company” Realty Income, the “monthly dividend company”, entered the UK with the purchase this week of 12 Sainsbury’s supermarkets for £429m from a British Land/Sainsbury’s joint venture. The sale-and-leaseback deal has been done at a 5.31% cap rate, includes annual rent increases and carries a weighted average lease term of around 15 years. It is the kind of deal where Realty can just sit back and watch the rent flow and compound over time. Perhaps not hyperactive or sexy, but certainly smart. As long as, at the end of that 15-year term, the property is still worth something. In the US it currently collects around $1.3bn per annum in rent from more than 5,700 properties. The REIT’s focus on single-tenanted assets let to retailers that are somewhat immune to the turbulence in the retail sector has meant that since 1994 it has been able to deliver an average annual return to shareholders of 16.5%, compared with 9.3% for the S&P 500 and Nasdaq. And is trading at a 60% premium to NAV. Conversely, the five-year total shareholder return for British Land, Landsec, Hammerson and intu respectively is 3.99%, 3.46%, -31% and -59.25%. It’s not unusual Realty isn’t that unusual in the US. As the US REIT market has matured, it has nurtured numerous new focused businesses that fully embrace the REIT principle and have served shareholders by being a little less active but perhaps a little bit boring. The brilliantly named STAG (Single Tenant Acquisition Group) invests only in single-tenant industrial units and in 2018 sat back and collected $82.4m of rent – a 289.9% increase on 2017. It is also able to pay a monthly dividend. There are others too – mostly specialist REITs. But what does this matter to us in the UK? Well, Realty is not going to stop at its Sainsbury’s acquisition. It reckons Europe is ripe for sale-and-leaseback consolidation with $11tn of investible commercial real estate, of which only $3tn is owned by professional real estate firms. It also won’t be the last of the US REITs to capitalise on the weakness of the pound. As UK retail investors learn more about the way these US REITs operate and share the income they receive on a monthly basis, could we see more pressure for our REITs to behave in that way? And if they can do it, why can’t we? It will, of course, require a big change in the mindsets of UK propco CEOs and the adoption of a new, less active approach to capital allocation. And perhaps an understanding that activity does not always breed success and you don’t have to do extraordinary things to get extraordinary results.   To send feedback, e-mail samantha.mcclary@egi.co.uk or tweet @samanthamcclary or @estatesgazette