Real estate bosses on zombie REITs, the downside to NAV and merger urges

Life isn’t easy for the leaders of real estate companies on the listed markets. The gaps between share prices and net asset values are wide and arguing that the metric is outdated will usually fall on deaf ears. Shareholders can pile on pressure for shifts in strategy and sales of assets, portfolios or even entire companies. Securing fresh funding is do-able for the best but can be tricky for the rest. But David Sleath, chief executive of SEGRO, seems like he wouldn’t have it any other way. “There are lots of stresses and strains and challenges associated with being a publicly listed company,” he says. “But we need to not forget that there are a lot of advantages with the listed space for companies and management teams that have a successful business that is going to grow and need more capital on a repeat basis.” Back in February, the industrials specialist raised £900m in equity from shareholders to fund development and acquisitions. “It’s literally a 24-36 hour process,” Sleath says. “Look at the challenges most people in the private capital space have had in trying to raise capital – and when they are successful it can be a six- or 12-month period, or longer, to raise the money they want.” Night of the listed dead Sleath spoke on a panel session hosted by the European Public Real Estate Association and law firm CMS, joined by other listed real estate chief executives and leaders who offered their takes on what 2025 might hold and – over the longer term – the factors on which the success of the sector will depend. For Tom Walker, co-head of global listed real assets at Schroders, the issue and its solution are simple. “What we need is a focus on total shareholder return,” Walker says. “You need those investors to get a positive experience investing in the sector. That then begets more money, which gets a more dynamic sector. We just don’t have that right now.” Instead, Walker says, much of the market comprises “too many REITs, which were not set up for shareholders – they are set up for external managers”. “There are some very good examples but there have been some which haven’t done the right thing for shareholders,” he says, adding: “Because of the poor experiences of many non-specialist investors, who wouldn’t have known the differences between internal and external management and performance fee structure, they are not going to touch the sector again. “They have seen dividend cuts and they’re just going to be out. We have really shot ourselves in the foot by poor corporate advice coming through over the last 10 years or so leading to too many REITs, which are now basically zombie REITs.” It is a criticism many in the market have made. What Walker calls “zombie REITs”, TR Property Investment Trust fund manager Marcus Phayre-Mudge has termed “space junk” – companies that are “just sort of floating” until drawn into the orbit of a bigger buyer. And would-be acquirers are well aware of the opportunity; last year LondonMetric Property boss Andrew Jones told EG that “just as it is my job to buy an asset or a portfolio, it is my job to buy companies”. The company has bought LXi REIT, and Jones says when smaller REITs are as mispriced as they seem, someone has to “do something about it”. And EPRA’s guests see the trend continuing. “There’s going to be more M&A for sure,” says Ben Green, principal at Atrato Capital, investment adviser to Supermarket Income REIT. “There are too many REITs that are stuck and too small. Some of that’s going to be taken private, some of it further mergers. I expect to see quite a few transactions this year.” As those deals are thrashed out, Walker adds, it will become survival of the fittest: “You need that dynamic of M&A. You need that to show that it’s Darwinian: the weak go, the strong get stronger.” No to NAV The next question, then, is how to define strength. Real estate bosses appear increasingly put out by investors’ focus on net asset value over other metrics such as cash flow. Richard Shepherd-Cross, managing director of Custodian Capital, has previously said NAV is given an “undue focus” by investors, adding: “We should be following the architects of the REIT regime, the US, and be looking at earnings.” Schroders’ Walker tells clients that company-reported NAV “is the most useless bit of information you’re ever going to get told”. He means no disrespect to valuers, he adds – he used to be one – but the metric is “historical”. “There are many other valuation methodologies that you need to be using,” he says. “The UK is really the only market where we have this obsession with [NAV]. The rest of the world doesn’t care too much. I think what we need is generational change – as the youngsters come through, they are not going to focus on it as much. It’s not going to be zoomed in on. “We just need the oldies to get out who focus on it. The dream is to become like the US, where it’s not stated – the market decides and you support it or you don’t.” It is a sentiment echoed by Sleath. “Ultimately, investors decide,” he says. “If investors want to back your investment proposition because you think you can offer them an attractive return on capital for whatever use you’re raising your money for, then it’s up to them to use whatever metric they choose. “In the listed space, the analyst community and a lot of specialist REIT investors are overly focused on NAV to the exclusion of some of the other metrics. In reality, most people we speak to are focused on a range of things. We would rather not be raising capital at a significant discount to NAV, but it’s really a question of what are you using the money for? Have you got an attractive proposition to put it into and can you deliver returns for your investors?” British Land chief executive Simon Carter also sees too much attention paid to NAV. “For me, it’s more about attracting generalists to the sector,” he says. “The sector has shrunk. They need to find a reason to come, and if we have got these different metrics [it will] make it a little bit more impenetrable for them. This movement to income-based metrics is good and to be welcomed, but equally, it is about quality of earnings, it’s about quality of assets. There’s absolutely a perfect place for NAV. [But] our objectives as a business, our targets, are income-focused total accounting returns. We do think very carefully about raising money at a discount, but if we can earn our cost of capital, exceed our cost of capital, then we will look to take advantage of that.” British Land secured £300m in equity when it struck a deal last year to buy a £441m portfolio of retail parks from Brookfield. The new shares were priced at 422p each against its most recent net tangible assets per share of 567p. “It’s a great process to be able to raise capital very quickly,” Carter says. “We closed on a transaction at 4.30pm and two hours later we had the money to pay for it. You just couldn’t do that in the private market. The conversations we had with investors were absolutely along the lines of: ‘Are you going to earn your cost of capital on this incremental acquisition?’ And we were able to demonstrate a big order book.” Best of both worlds Industry leaders had differing thoughts on the draws and drawbacks of raising public capital versus private. “One of the challenges for the European listed sector is that it just isn’t very big compared with the overall real estate space and overall equities, and so there is relatively little capital dedicated to listed real estate equities,” says Atrato Capital’s Green. “For real estate specialists in listed real estate equities, we are all still relevant, but if you’re a global equities manager, you’re comparing us to investing in the Magnificent Seven [US stocks], right? That’s a real challenge.” In the private market by contrast, Green says, the weight of capital targeting real estate is far greater. “It is currently easier to raise capital in the private space than it is in the public space, in terms of investors’ willingness to engage in the conversation about putting more capital to work in listed European real estate,” he says. “At the same time, we are potentially in a situation where it’s massively oversold, and there’s actually a huge value opportunity here. And that’s the message we need to get across to people: that at the darkest hour, that’s the time when you should be overweight in the sector.” But, at Unite Students, which raised almost £450m in equity from shareholders earlier this year, chief executive Joe Lister disagrees. “We have been incredibly well-supported from our investors to raise capital at the right time to deploy into activities which enhance our overall returns,” he says. “At the right time, for the right deployment of capital, the public markets are incredibly efficient. “We have got what is hopefully a temporary movement in where our shares are what makes it very difficult, but I don’t think anyone’s sitting on this panel thinking that we’ll be trading at these discounts for a long period of time which will stop us doing things.” Unite also has access to private funds, however, which Lister sees as a balancing act – and one that he is happy to act on both sides of. “The drivers are very similar, the return requirements are very similar and it’s just playing to the needs of those different investors at the right time and matching their requirements to what you need as a business,” he says. “For us as a business, it has been incredibly valuable having access to both pools of capital, because there will be moments when they may not be available and having something else in your toolbox has been really beneficial for the growth of our business.” British Land’s Carter weighs in. “It’s permanent capital,” he says of equity raised from shareholders. “Private capital does have its drawbacks, particularly when it’s not permanent. The other thing is, the best [private equity] funds, the Blackstones of this world, can raise huge amounts of capital and they have been the real winners. But for the next tier down, smaller PE, it’s a very tough environment at the moment for raising capital.” No easy answers then, after a tough year for real estate bosses. But a snap poll of EPRA’s audience found most of the room “optimistic” about 2025 – with “cautiously optimistic” in second place. SEGRO’s Sleath found cause to be upbeat. “We all like to have our moans about our particular bit of life, but the listed space is a phenomenal market,” he says. “It’s just a shame there aren’t more good companies coming through. Maybe something will change.”