The third annual ULI UK REIT seminar took place at law firm Goodwin on Tuesday 1 October 2019.

The seminar opened with a brief presentation ‘The importance of listed Real Estate’ by Dr Darko Hajdukovic, Head of Multi-Asset Primary Markets and Investment Funds, London Stock Exchange plc. The presentation slides can be downloaded here.

This was followed by a panel discussion moderated by Louisa Clarence-Smith (Property Correspondent of The Times). The panellists were:

• Toby Courtauld (Chief Executive, Great Portland Estates)
• Simon Robson Brown (Principal, Portfolio Manager, Europe, CBRE Clarion Securities)
• Roger Clarke (Managing Director and Head of Capital Markets, IPSX)
• Octavia Peters (Operations, Finance Director, SEGRO plc)

The panel kicked off with a lively discussion as to why the sector has not really grown as expected. Although the original 9 REITs when the legislation came into effect in 2007 have grown to 53, there is a long tail of smaller REITs and the overall market capitalisation has not expanded as some might have hoped. The timing of the introduction of REIT legislation immediately before the market collapse could not have been worse and it has been a bumpy path since then.

What is best for the investors will vary from REIT to REIT depending upon where we are in the market cycle. Toby Courtauld outlined that, for Great Portland Estates, their returns at this point in the cycle are lower than their cost of capital and for the last three years, they have been returning equity to investors. Conversely for SEGRO, with industrial property currently outperforming, Octavia Peters highlighted that they have been the most active REIT in raising new equity. The requirement in the UK REIT rules that a REIT must distribute 90% of its profits means that REITs cannot grow by reinvesting income. To invest and expand, they must raise new equity.

The market continues to evolve, increasing the options for companies wishing to IPO. The original REIT rules from 2007 were relaxed in 2012 which encouraged new entrants to the market. Roger Clarke briefly explained the new IPSX exchange and what this will bring for companies owning single real estate assets.

The panel moved on to another profound debate. A seemingly innocuous question about the focus on Net Asset Value quickly morphed into a broader discussion on valuation and an existential discussion on the purpose of REITs. After a healthy exchange of views, it was concluded that this will vary from REIT to REIT too. For some REITs, without growth in the capital value of the underlying assets, the returns will always be less than the cost of capital. If the business rationale is to outperform the cost of capital by growing asset value through development, then an investor focus on NAV is entirely understandable. If the business rationale is to deliver a dividend, then an investor focus on earnings is more appropriate and the way in which investors look at value may change over time.

This in turn led to a discussion on the challenges of managing the conflicting demands of investors with a long term and short term outlooks. This was taken further with a question from the floor about activist investors. The view from the panel was that healthy, well-run businesses had nothing to fear from activist investors. An outbreak of activists is usually a symptom of a deeper malaise.

The direct scrutiny of the public markets and the impact that this has on governance was cited as a strength of the listed sector. It was under the bright lights of a potential IPO that the weaknesses of governance of WeWork became visible.

The huge range of premiums and discounts to NAV at which REIT shares are currently trading prompted comment as to whether this could be a trigger for M&A activity. In order for the discount to NAV to translate into a successful takeover, investors need to be prepared to sell at that price.

The panel addressed the thorny question of political instability and Brexit. This also featured in the previous two annual REIT seminars, and indeed the 2018 seminar had concluded with the remark that we had been living with uncertainty for a decade and that it would no doubt still be uncertain when we reconvene in a year’s time. Neither the question nor the answers have really changed much since then. Despite the uncertainty, the market remains remarkably resilient. It was observed that the lack of political reliability is hardly unique to the UK at present and investors have to put their money somewhere. Collectively, UK REITs are in a much better position to resist market volatility now than they were when the legislation came into effect in 2007.

Another crucial area discussed by the panel was the importance of the ESG agenda. This has become an increasing concern for investors, but particularly for the office sector is being driven more rapidly by the occupiers. The view was expressed that with the current pace of change, within five years every REIT will be an ESG fund. The major challenge is the lack of consistency and transparency, an issue previously discussed at the ULI Capital Markets / ESG seminar in April.

As ever, thanks are due to our speaker, moderator and panellists for a lively and open discussion.

Words by John Forbes, John Forbes Consulting LLP, ULI Capital Markets Committee Chair