July 8, 2026 • 26 mins
The number of REITs (real estate investment trusts) listed in London has shrunk dramatically over the past five years. Now the biggest REIT on the market is the subject of a bid from a US buyer. In this week's personal finance edition of Merryn Talks Your Money, Bloomberg senior reporter and author of the Money Distilled newsletter, John Stepek, is joined by Bloomberg real estate team leader Jack Sidders to discuss the health of the UK's commercial property sector, whether there is more consolidation to come, and what it might say about REIT valuations.
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Speaker 1 (00:02):
Bloomberg Audio Studios, Podcasts, radio news. Welcome to Merton Talks
Your Money, the personal finance edition of MERN Talks Money,
(00:23):
and these bonus podcasts we talk about best strategies for
making the most of your money. I'm join Stepwick, senior
reporter for Bloomberg and author of the award winning Money
Distilled newsletter. Mern's out today, but join me in the studio.
Very kindly is Jack Siddars, who is Bloomberg's team leader
covering real estate and European investing. Jack, thanks very much
for joining us today.
Speaker 2 (00:44):
Thanks very much for having me.
Speaker 1 (00:45):
So, just to give you an idea of what we're
going to cover, We're going to talk about what is
a rate a real estate investment trust. We're going to
run through an overview of what's been a hectic five
years for the sector in which it's basically halved in
terms of the number of that are on the UK
stock market. Then we're going to talk about a particularly
a big deal that's going on in the reat sector.
(01:06):
The biggest UK listed has been targeted by a US
peer Jake's been doing before and very Keenley kind of
talked us about real estate investment trust. But just for
listeners who are are new to the show, perhaps a
quickly means that what is a real estate investment trust?
Speaker 2 (01:23):
Jack? Yeah, sure, thanks so well. Real estate investment trusts,
or routs as they're commonly known, are basically publicly traded landlords.
The ret regime came in just just after the global
financial crisis about about twenty years ago. And the idea
is that so, unlike a conventional listed landlord that can
(01:44):
kind of do whatever it likes with the money it makes,
a distributes the vast majority of its earnings in the
form of dividends to shareholders. So mostly it owns investment properties,
properties that are rented out to companies that generate a rent,
and it pays those rents out in the form of
dividends showers. But they'll also do most of them will
do a little bit of developments. They have a development
(02:04):
portfolio as well, and that might be where they make
their sort of development profits from building buildings of renting
them out and then selling them on.
Speaker 1 (02:10):
Yeah cool. So yes, it's all about getting the rent
and paying the devidanzo and they get various tax kind
of conversation.
Speaker 2 (02:18):
Yeah, the tax is key, I should should have so Yeah,
so that it's it's a sort of tax advantage structure,
so that you're not paying kind of double taxation. So
they have some exceptions that the other landlords don't don't
benefit from.
Speaker 1 (02:33):
Obviously, it's been an absolutely wild five years for most
kind of investments. But obviously with things like COVID and
the pandemic and working from home and the impact on
office buildings and otherstic it's always through was harmed in
the sector over the last five years because as I
(02:55):
understand it will certainly haven't. I've seen various statistics. They
see that roughly ety oil and reaps and the uklist
did a bit five years ago and knew that it's
going on that we don't have about forty perhaps even
slightly at this you're talks through way that's harmed or
who that has come about.
Speaker 2 (03:11):
Yeah, of course with it, and there's there's a lot
to unpack there. If we start just talking about real
estate commercial real estate very broadly, and then we can
talk about the particular issues that have impacted the listed
part of it in the resector in particular. But for
real estate, I guess probably the most important thing fundamentally
is interest rates and bond yilds. So if interest rates
(03:31):
in a time when interest rates were very very low
and therefore bond yields are very very low, real estate
was seen as quite an attractive alternative in which to
allok capital because it was throwing off a bit more yield. So,
even though yields got sort of squeezed lower and lower
and lower, and therefore real estate values pushed up higher
and higher and higher, it was still offering a kind
of premium over risk free rates, over government debt, over
(03:53):
corporate debt as well. Now, come twenty twenty two, the
sort of end of the cheap money era, risk free
rates blow out, interest rates go up, bond yields go up,
all of a sudden. Real estate values had to adjust
to reflect that reality, because why are you going to
buy an a liquid building that is yielding less than
a basically risk free government bond. You're not, so that
(04:13):
the value has to go down. The yield on the
property has to go up in order to make it attractive.
So that is the single most kind of important thing
that has happened to commercial real estate as a whole
over the last five years. Now you mentioned there's then
been a whole bunch of other different sort of structural
issues within the different types of commercial real estate that
have also had a huge impact. So we had COVID
(04:33):
impact on offices or bit that, you know, maybe a
lot of that was more sentiment than reality. We've had
the rise of online retail and how that's affected the
shopping center or conversely, how that's affected the warehouse, so
very simply generally speaking, bad for shopping centers, good for warehouses.
So those sorts of factors are at play as well,
but then for the reach sector in particular, so publicly
(04:55):
traded real estate, and it's a funny kind of asset
class because in theory it sort of should trade like
any kind of commercial property, but the reality is these
are publicly traded stocks and therefore their subject to kind
of equity market volatility. So you mentioned that there were
dozens and dozens and dozens of uk uts, but lots
of them were quite small. And one of the problems
(05:16):
is it sort of doesn't necessarily take a much bigger
team to run a publicly traded landlord that has one
hundred billion in assets than it does one that has
one billion in assets. So what that means is small
routes are quite expensive to run, which is not great
for sheld. You've also then had the many and well
documented issues with the UK market and the sort of
general lack of liquidity in the UK market and UK
(05:40):
assets generally trading at a discount. So all of these
things have kind of compounded the issues that you know,
all real estate, all UK real estate has had, but
publicly traded UK real estate in particular has been a
really unloved place for quite a long period of time. Now, now,
how have management teams reacted to that? And how of
opportunities investors reacted to that? A lot of deal making,
(06:02):
So to start with, you had a lot of public
to private deals. So private equity firms going, hmmm, I
can see that that RUT is trading at a big
discount to the sort of reported value of its properties. Therefore,
if I can offer shareholders a bit of a premium
to where the shares are trading right now, but still
a discount or the value of their assets, well the
(06:23):
shareholders are happy, and I'm happy because then I can
probably sell those assets on on the private market, and
if I get book value, I'm making good money. So
we had a whole load of public to private deals
by you know, the likes of Blackstone and Brookfield, et cetera.
But then more recently we've also had a whole load
of deals of sort of peer to peer deals where
I might be a retrading a discount, you might be
a retrading a discount. But if we do a kind
(06:44):
of all shared deal, it kind of doesn't really matter.
It's good in theory for shareholders because then we have
a bigger asset based, bigger company, more efficient to run,
lower cost to run. Maybe we get into a bigger index,
so we might go up into the you know, the
foot of one hundred or and therefore we get more
pasts of investment you know, white white port of shareholders,
all of which is good. So that's been a huge
(07:05):
driver of consolidation within the sector, which you know, all
of which has ended up where we are today with
the biggest rate in the UK. Now the subject to
interest from the Goliath, the Godzilla of publicly traded real
estate globally prologies.
Speaker 1 (07:20):
Yeah, I mean, this is a massive deal. Is one thing.
One thing I just wanted to ask you about that.
I think your point about costs of managing our portfolio
is really interesting. Just before we get to prologe, is
why did so many basically sub scale reaps actually get
off the ground in the first place. Was it just
because it was tam made cheap money, or was it
(07:44):
because I noticed that a lot of it's very niche
if you go back, it's like, you know, doctors, that
sort of thing. Lots are different and I'm just wondering
what it was that made it, I guess, feasible for
these companies to launch kind of essentially very tiny portfolios.
Speaker 2 (08:00):
Yeah, it's a good question, and the answer to that
would sort of vary with you know's there's many different
stories behind each kind of different and different state. But
if you take for example, Unite, they are the UK's
biggest public shredded student landlord. Now, twenty years ago, student
housing was sort of non existent as an institutional asset class.
(08:21):
It was really wasn't really a thing. Unite they managed
to raise a small amount of money ipode and they've
really ridden this huge wave of investment into higher education
accommodate or accommodation for students and have done fantastically well.
And it's developed from what was an incredibly obscure niche
asset class is now quite a mainstay real estate investment.
(08:42):
You know, you look at look at Blackstone in the
world's biggest real estate investor. Their single biggest sort of
bet in UK real estate is in student housing. So
it's become this very mainstream asset. Now that's a great
story if you were there in the early you know,
right at the start with Unite, you've done fantastically well
it albeit the last couple of years maybe less so.
So there's been lots of you know, enterprising people who've
(09:03):
gone right, I think this sector or that sector is
going to be the next big thing, so they've maybe
raised a bit of capital and then for what reason,
it hasn't quite worked out. Again, some of it is timing.
You know, we saw after twenty twenty two when rates
blew out, you know, all the reachshare prices collapsed. There
were people who were then going out talking to investors,
going right, this is the start of a news cycle,
this is the time, let's raise some capital. But the
(09:24):
trouble is, you know, we then had other shocks that
then meant that those companies then maybe they did list
they raised a small amount of capital, but then very quickly.
They were trading at a discount and then they can't
raise any more capital and they're kind of stuck. And
so we just had lots and lots of these minnos
who did manage to get off the ground, but then
never never got any further and they've just been consolidated. Basically,
(09:44):
all these subscale players have started to be consolidated.
Speaker 1 (09:47):
Yeah no, and that makes a lot of sense. So
I's a consolidation that takes is to you that can
the deal with the D So talking through Sacrel is
the biggest real estate investment trust less than the UK,
and it's it's a top. It's in the Footsie fifty,
so it's the top by end of the Footsie one hundred.
So it's a big, big company joint talk is through
what it does and more. The dealers weep at all lugers.
Speaker 2 (10:10):
Yeah sure, yeah, I mean they are there would be
you know, Crown Jewels of UK probably traded real estate
and actually their their origin story itself is quite interesting,
particularly when it comes to M and A. But so
they they are principally a warehouse landlord. They rent out
warehouses to you know, various different types of industrial occupies
and increasing in these days to online retailers and people
(10:31):
like that. They so historically commercial real estate, you would
have set the three big sectors where offices, retail and warehouses,
and offices in retail would have been the kind of
twin aristocracies, and sheds would have been the like the
unsex habit sorry sheds being what people in commercial real
estate call warehouses. And so for your big pension fund,
it would maybe and this is very crudely speaking, maybe
(10:53):
they would have had forty percent of the portfolio offices,
forty percent in retail and twenty percent in warehouses. Now
these days a you know, that's the allocation has been
completely upended and is way more diverse. But the big
story has probably been the massive reduction in the allocation
to retail and the massive increase in the allocation to
industrial and warehouses and logistics because of the rise of
(11:15):
online shopping. The rental growth has been unbelievable. Seagro previously
known as Slower States exactly reflecting their sort of prime
asset to the west of London, very popular place for
warehouses and these days increasing the data centers and we'll
come on too, that they did a very very well
(11:36):
timed deal. Just during the GFC they bought a company
called Brixton, which is the sort of a peer of theirs,
which was very very over levered, as were they all
at that point, and it had a lot of vacancy
in its portfolio. They managed to buy them in about
two thousand and nine pretty cheap, basically rescued them. And
what that meant was that then sort of significantly expanded
(11:56):
their portfolio and they had a lot of space to
let just as the e commerce story was just kind
of starting to take off, and that would be a
few years before that really became clear. But basically over
the last ten to fifteen years they have benefited massively
from that, just all this extra demand not only from
Amazon but also from you know, conventional retailers who've gone
what's known as omni channel and now do online and
(12:18):
physical retail. So that is that's the sort of backbone
of their business, not just UK, big portfolio in Europe
as well. Then over the last several years, the story
has evolved, you know, the really hot sexy area within
the world of industrial logistics became what's known as kind
of last mile or urban logistics, and those are the
small warehouses near near our houses, which retailers, which are
(12:40):
really sought after by people who want to deliver to us.
Because fine, if you're talking about the UK and you're
you know, big retailer John Lewis you know, or Amazon,
you probably but your massive, massive warehouse, your mega shed,
you put that somewhere in the Midlands near the M one.
Speaker 1 (12:55):
This is big box.
Speaker 2 (12:58):
Yeah, So you drive up the M one past North
and you'll just see all of which is where I
grew up. You see all these huge, huge warehouses and
they're the ones that are designed to kind of serve
the whole country, so you can drive anywhere within eight
hours from there, which is how long drives are allowed
to drive. So ideal place to put it. But that
doesn't really help with you know, your same data delivery
or your next day. So what then Amazon or their
(13:19):
peers need is lots of little warehouses very close to
where we live. Urban logistics and the rents for those
have gone absolutely through the roof, partly because they're competing
for space. You know, live in cities like London, there's
not enough housing, it's not enough all sorts of things.
So all of those are under pressure from other uses.
So even if you you know, if you own one
of those and you're struggling to rent it, which you
(13:39):
know in the current market is quite unlikely, but even
if you were struggling to rent it as a warehouse,
well you can probably make a lot of money from
converting it to residential. So that subsector has done very well,
and again Secret has got quite a big portfolio there.
And now the future story for Seagro is the data
center part, which is something that they've just sort of
relatively tended to be started to talk about over the
last few years, may be a bit more vocally over
(14:01):
the last year or two, where they have a lot
of what's what's called powered land, so they have these
sites that have access to power, which is the critical
thing when it comes to data centers. And as mentioned,
they have a lot of these, a lot of land
in West London in Slough which is actually key corridor
for a lot of this stuff. So there's loads of
potential to build data centers on land that they own,
(14:24):
some of which you know previously would have been warehouses.
So if you're a warehouse landlord and all of them
have been doing this, you've been going through your portfolio
the last couple years. Going Hm, this was a warehouse
that I was renting out for tanquedd at square foot
to some you know company that makes widgets. Actually it's
got power. I could convert it to a data center
and maybe a hyperscale will take it and pay me
a hell of lot more to pounds of square foot.
Speaker 1 (14:44):
So this is basically stuff that's just readly egal as
data centers rather than they haven't actually they don't all
in any data cent.
Speaker 2 (14:51):
Yeah, well so they have a small, very small amount
of kind of operational data centers. But it's basically it's
it's it's a development story. It's a powered land story.
And what Segro and some of their peers have been
doing today is that they're not data center specialists. They
haven't got a long track record of building this stuff.
So they've either been partnering with data center specialists or
sort of just developing stuff to to sort of shell
(15:15):
and court, so to speak, and then a specialist comes
in and does does you know some of the more
technical stuff. Now, as time goes on, they might acquire
that expertise, they might look to take on some of
this data center development directly. Themselves that we'll see how
that story evolves. But that is one of the things
that's kind of central to this debate about whether or
not pro logist is interested in Segro is you know,
(15:35):
at fair value.
Speaker 1 (15:44):
Sole logists come along. It's an all shared deal and
saw but basically if you're a secret shared order, you'll
get a bit of the convened entity. And what is
it that the current place is roughly eat pooon something other,
isn't it? Yeah, well did it above name pounds? But
because the ship places have changed.
Speaker 2 (16:04):
Exactly, yeah, so when they initially so it's well, interestingly,
religis approached. Segos board made proposal, Seagros board unanimously rejected
it just then basically immediately went public and said we're
going to tell the market we've made this proposal to
so they didn't go back and make another offer, which
you know, I think is interesting in itself. That proposal
(16:24):
at the time valued Sigarette about nine twenty five pence
a share, which when you know, is basically exactly in
line with Seagro's nasset value, their AAV their last reported one.
So essentially, you know, we will pay you Secro shareholders
what the company says the assets are worth and given
that the company at the time was trading at about
twenty percent discount to its NAV. Okay, that's a twenty
(16:45):
percent premium to the to the undisturbed share price now
secret obviously a midily turned around and go, well, hang
on a second, our share price has been walloped by Iran.
And actually, if you compare it to you know, the
share price pre Iran, it's not a very hefty premium.
And also the NAV it's quite a conservative, backward looking
sort of measure. Yes, that doesn't ascribe a huge amount
(17:08):
of value to the sort of potential future earnings in
our development pipeline.
Speaker 1 (17:12):
You're not placing then the data cent at least not
exactly exactly.
Speaker 2 (17:18):
So Segro, as part of its defense today, has come
out with a document or with valuations done for it
by CBRE, trying to kind of show the value that
they think is there the future earnings that there will
be from their from their data center pipeline. And you know,
wouldn't you know it? It's a lot.
Speaker 1 (17:37):
It's a NOV plus optimism take off.
Speaker 2 (17:40):
Yes, yeah, And to be fair to Seegro, this, you know,
this is not just purely hope value. There are different
ways of assessing real estate, and actually this deal kind
of perfectly highlights it because the UK, you know, arguably
and maybe a little bit anachronistic, we still tend to
think about NAV as a sort of key metric for
understanding real estate value and how we talk about roots
(18:02):
and revaluations. Although a lot of analysts would you tear
their hair out and say, please don't we do when
we when we have these deals, we talk about you know,
is it a discount? Now? Is it?
Speaker 1 (18:10):
Would analysts fear?
Speaker 2 (18:12):
So we focus more on earnings, which is how the
US do actually value their companies. So because I immediately
did this when you know, when the deal was well,
when the proposals announced that, right, so you know this
is roughly in line with NAB. How are the peers
in the US trading Well, you can't, you know, they
don't publish their NAB in the same way. But what
(18:33):
you can say they focus on earnings. They focus on
you know, f FO and metrics like that, funds from operations.
What you can see is particularly the data center landlords
in the US, digital realty next, people like that are
trading on really really elevated multiples to earnings, which you know,
it's not an apples to apples thing, but I think
it's fair to say they would essentially be trading at
(18:56):
a big premium to NAB, which is kind of the
market awarding a lot of hope value there. And you
do see that in the UK sometimes, you know, when
when the stock market decides right, you know we're at
the start of cycle, we can see that values are
at the bottom and they're about to go up. You know,
hopefully rents are about to go because no one's built anything.
(19:17):
The sector will sometimes then traded a slight premium, and
then Segre itself was trading at a bit of a
premium for a few years before, which was you know,
to do with the fact that warehouse there was a
scarcity of warehouse space. Rents were going up very very fast,
so the market was willing to price in a bit
of that future growth.
Speaker 1 (19:35):
Then it does feel a little bit like that classic
UK US valuation go up more broadly, and you know,
all the takestocks went less than the US because people
actually put appraisal on them. The feel is more reflective
of the potential, etc. I mean, that's interesting. We don't
know what will happen with there still one or the
(19:56):
other that's clearly in progress. But again going back to
fake this is the biggest street in the in the
UK by quite a long week. It's like a fete
of the sector or something like that accounts for by
market value. How much more consolidation can thus be left
in the sector if you're later at this point a.
Speaker 2 (20:14):
Really interesting question. There was a bit of a sense
that it had maybe been slowing down slightly from a
somewhat frenetic pace. But that said, I mean a be
interesting to see what impact this deal were it to happen,
you know then has and actually also in terms of
you know, potentially some some new companies coming to market. Yeah.
Bloomberg reported the other day that Blackstone has done some
(20:36):
very initial investor meetings on a company called Indurant, which
is one of its portfolio companies, which owns a lot
of UK warehouses, which rest I see, you're able to
disappear as a publicly traded the UK name.
Speaker 1 (20:48):
Maybe there'll be a new one.
Speaker 2 (20:51):
Yeah, Well, this is not something to be clear that
we're reporting is going to happen anytime particularly soon, but
you know, very.
Speaker 1 (20:57):
Very early there is the glimmerings of a potential.
Speaker 2 (21:00):
Yes, but if we go back to what we were
talking about earlier, and you know cost and you know
that being a driver of consolidation, there's there's clearly there's
a lot more to be done. Right, We've got multiple
For example, let's take London offices where you've got two
London office routes that you know are both arguably still
(21:21):
somewhat subscales. That'd be great Portland and derwant London. You know,
for many, many years has been speculation about well, could
they do something? Would they do something? Now obviously neither
management team is going to be terribly incentivized to do
that and you know, do themselves out of a job.
But there's there's that as an opportunity. You've got some landlords,
you know, trying to pivot into different sectors and again
(21:41):
that potentially an opportunity there to sort of take out
subscale businesses into those in those new sectors that they
want to get into. And you know, again today what
do you know, Trump talking about the Iran c is
far being over straight away all the real estate stocks
have sold off again, there'll be some more opportunity to
stic for evate equity capital wizing in the wings, if
(22:02):
that is to persist in those discounts blow out again. Yeah,
there's several UK rates that are still triding it really
quite massive discounts to their to their reported asset value.
Speaker 1 (22:11):
I mean, I do think this is and I guess
this must be frustrating for people in the sector. But
at the same time, if you are an investor, kind
of private investor, and obviously nothing on this podcast is
a recommendation or anything like that, if you're of the
view that interest rates in the UK are probably are
possibly going to come down, or that the market is
(22:33):
overly pessimistic about the direction of rates rather thinks are
going to keep going up, then rates are fairly interest
rates sensitive sector and a fairly obvious way you play
those hunches one way or the other. But beyond that,
there is also there is quite as you say, most
of these are trading that fairly solid discounts to their
net asset value. It's true the sectory, and I from
(22:56):
a value point of view.
Speaker 2 (22:58):
Yes, there's a whole load of different ways you can
slice it and die it. But basically the UK sector
right now is on a massive, massive sale. And if
you're willing to take a view that probably we are.
You know, the direction of rates is more likely to
be steady or down than it is up. Then, you know,
then that would be a by signal. There's also you know,
(23:18):
it's not just interest rates. The actual value that management
teams bring here is supposed to be on the operational side.
So in terms of increasing rents, increasing earnings, well, that
side of the ledger actually looks pretty positive for the
reason being that, you know, going back even further, we've
had Brexit, then we had the pandemic, then we've had
(23:39):
you know, runaway inflation, so a whole series of bad shocks,
which kind of means across most sectors, no one's really
built very much for ten years plus now in the UK,
whether that's offices, you know, retail, no one's built anything
because we had far too much of retail. Warehouse development
has still gone on, but even a lot of that
was kind of upended by the end of the cheap money.
(24:00):
So there isn't there's certainly not oversupply in many if
any sectors, and in quite a few of the sectors
there's really quite chronic undersupply, and assuming that the economy
you know, Okay, the economy has not been going great guns,
but assuming it sort of continues to just about take along,
that should mean that rental growth is pretty robust, and
therefore that should be a good growth opportunity.
Speaker 1 (24:22):
Yes, in the credit and the micro side. Because the
other I think that is something we haven't really talked about,
but because the other big issue for vestas is if
you're a freie, this can be a receation. That means
lots of empty premises, means lots of can you the
landlord's carrying a lot it can avoid basically, And that's
actually something that we haven't really seen because walking from
(24:42):
home didn't end up being permanent. And you know, we
didn't have a massive recession at any point over the
last five years, despite all the kind of expectation that
we would, so the actually, as you see, the actual
operational side of the industry has been pretty robust.
Speaker 2 (24:57):
Yeah. I mean, the other thing to say on that
point is if you go to the you know, the
last really painful recession, I mean, putting the pandemic to
one side that we had here in the financial crisis. Yes,
obviously there were huge credit issues within within landlord's portfolios
in terms of their tenants. But even then vacancy didn't
actually get that much. I mean, yes it got worse,
(25:19):
but it wasn't existential. What the real problem was the
fact they were all massively over leveraged, and that was
the big issue. That they have learned their lesson. The
UK reads have learned their lesson, and as a sector
they are not generally speaking, significantly over leveraged now. They
are generally carrying pretty conservative levels of leverage, which you know,
even if there were to be some other significant shock
(25:40):
that came along now which suddenly you know, pushed real
estate values down significantly. Again, they've still got a lot
of headrooms, so that kind of major threat to the
sector they've largely dealt with.
Speaker 1 (25:51):
Yeah, it's pretty resilient. Well, Jake, that was really really useful.
Really appreciate your team, and thanks very much for coming.
Then again, I'm sure we'll get you back in when
we find out what actually happens with this secret deal.
Speaker 2 (26:04):
Yeah, yes, well I'm sure it'll keep me busy for sometimes.
But thank you so much for having me.
Speaker 1 (26:13):
Thanks for listening to this week's Merton Talks Your Money.
If you like a show, rate reviewing, subscribe whatever you
listen to podcasts. Also, be sure to follow me on
Exit Joint and does host Effect. You can find Jack
on LinkedIn. The Family saw the most exciting of all
social media outlets. This episode was produced by Summer, Sadi
and Moses and questions and comments on this show and
all the shows are always welcome. Our show email is
(26:35):
mereon Money at Bloomberg dot in net.
Bloomberg Audio Studios, Podcasts, radio news. Welcome to Merton Talks
Your Money, the personal finance edition of MERN Talks Money,
(00:23):
and these bonus podcasts we talk about best strategies for
making the most of your money. I'm join Stepwick, senior
reporter for Bloomberg and author of the award winning Money
Distilled newsletter. Mern's out today, but join me in the studio.
Very kindly is Jack Siddars, who is Bloomberg's team leader
covering real estate and European investing. Jack, thanks very much
for joining us today.
Speaker 2 (00:44):
Thanks very much for having me.
Speaker 1 (00:45):
So, just to give you an idea of what we're
going to cover, We're going to talk about what is
a rate a real estate investment trust. We're going to
run through an overview of what's been a hectic five
years for the sector in which it's basically halved in
terms of the number of that are on the UK
stock market. Then we're going to talk about a particularly
a big deal that's going on in the reat sector.
(01:06):
The biggest UK listed has been targeted by a US
peer Jake's been doing before and very Keenley kind of
talked us about real estate investment trust. But just for
listeners who are are new to the show, perhaps a
quickly means that what is a real estate investment trust?
Speaker 2 (01:23):
Jack? Yeah, sure, thanks so well. Real estate investment trusts,
or routs as they're commonly known, are basically publicly traded landlords.
The ret regime came in just just after the global
financial crisis about about twenty years ago. And the idea
is that so, unlike a conventional listed landlord that can
(01:44):
kind of do whatever it likes with the money it makes,
a distributes the vast majority of its earnings in the
form of dividends to shareholders. So mostly it owns investment properties,
properties that are rented out to companies that generate a rent,
and it pays those rents out in the form of
dividends showers. But they'll also do most of them will
do a little bit of developments. They have a development
(02:04):
portfolio as well, and that might be where they make
their sort of development profits from building buildings of renting
them out and then selling them on.
Speaker 1 (02:10):
Yeah cool. So yes, it's all about getting the rent
and paying the devidanzo and they get various tax kind
of conversation.
Speaker 2 (02:18):
Yeah, the tax is key, I should should have so Yeah,
so that it's it's a sort of tax advantage structure,
so that you're not paying kind of double taxation. So
they have some exceptions that the other landlords don't don't
benefit from.
Speaker 1 (02:33):
Obviously, it's been an absolutely wild five years for most
kind of investments. But obviously with things like COVID and
the pandemic and working from home and the impact on
office buildings and otherstic it's always through was harmed in
the sector over the last five years because as I
(02:55):
understand it will certainly haven't. I've seen various statistics. They
see that roughly ety oil and reaps and the uklist
did a bit five years ago and knew that it's
going on that we don't have about forty perhaps even
slightly at this you're talks through way that's harmed or
who that has come about.
Speaker 2 (03:11):
Yeah, of course with it, and there's there's a lot
to unpack there. If we start just talking about real
estate commercial real estate very broadly, and then we can
talk about the particular issues that have impacted the listed
part of it in the resector in particular. But for
real estate, I guess probably the most important thing fundamentally
is interest rates and bond yilds. So if interest rates
(03:31):
in a time when interest rates were very very low
and therefore bond yields are very very low, real estate
was seen as quite an attractive alternative in which to
allok capital because it was throwing off a bit more yield. So,
even though yields got sort of squeezed lower and lower
and lower, and therefore real estate values pushed up higher
and higher and higher, it was still offering a kind
of premium over risk free rates, over government debt, over
(03:53):
corporate debt as well. Now, come twenty twenty two, the
sort of end of the cheap money era, risk free
rates blow out, interest rates go up, bond yields go up,
all of a sudden. Real estate values had to adjust
to reflect that reality, because why are you going to
buy an a liquid building that is yielding less than
a basically risk free government bond. You're not, so that
(04:13):
the value has to go down. The yield on the
property has to go up in order to make it attractive.
So that is the single most kind of important thing
that has happened to commercial real estate as a whole
over the last five years. Now you mentioned there's then
been a whole bunch of other different sort of structural
issues within the different types of commercial real estate that
have also had a huge impact. So we had COVID
(04:33):
impact on offices or bit that, you know, maybe a
lot of that was more sentiment than reality. We've had
the rise of online retail and how that's affected the
shopping center or conversely, how that's affected the warehouse, so
very simply generally speaking, bad for shopping centers, good for warehouses.
So those sorts of factors are at play as well,
but then for the reach sector in particular, so publicly
(04:55):
traded real estate, and it's a funny kind of asset
class because in theory it sort of should trade like
any kind of commercial property, but the reality is these
are publicly traded stocks and therefore their subject to kind
of equity market volatility. So you mentioned that there were
dozens and dozens and dozens of uk uts, but lots
of them were quite small. And one of the problems
(05:16):
is it sort of doesn't necessarily take a much bigger
team to run a publicly traded landlord that has one
hundred billion in assets than it does one that has
one billion in assets. So what that means is small
routes are quite expensive to run, which is not great
for sheld. You've also then had the many and well
documented issues with the UK market and the sort of
general lack of liquidity in the UK market and UK
(05:40):
assets generally trading at a discount. So all of these
things have kind of compounded the issues that you know,
all real estate, all UK real estate has had, but
publicly traded UK real estate in particular has been a
really unloved place for quite a long period of time. Now, now,
how have management teams reacted to that? And how of
opportunities investors reacted to that? A lot of deal making,
(06:02):
So to start with, you had a lot of public
to private deals. So private equity firms going, hmmm, I
can see that that RUT is trading at a big
discount to the sort of reported value of its properties. Therefore,
if I can offer shareholders a bit of a premium
to where the shares are trading right now, but still
a discount or the value of their assets, well the
(06:23):
shareholders are happy, and I'm happy because then I can
probably sell those assets on on the private market, and
if I get book value, I'm making good money. So
we had a whole load of public to private deals
by you know, the likes of Blackstone and Brookfield, et cetera.
But then more recently we've also had a whole load
of deals of sort of peer to peer deals where
I might be a retrading a discount, you might be
a retrading a discount. But if we do a kind
(06:44):
of all shared deal, it kind of doesn't really matter.
It's good in theory for shareholders because then we have
a bigger asset based, bigger company, more efficient to run,
lower cost to run. Maybe we get into a bigger index,
so we might go up into the you know, the
foot of one hundred or and therefore we get more
pasts of investment you know, white white port of shareholders,
all of which is good. So that's been a huge
(07:05):
driver of consolidation within the sector, which you know, all
of which has ended up where we are today with
the biggest rate in the UK. Now the subject to
interest from the Goliath, the Godzilla of publicly traded real
estate globally prologies.
Speaker 1 (07:20):
Yeah, I mean, this is a massive deal. Is one thing.
One thing I just wanted to ask you about that.
I think your point about costs of managing our portfolio
is really interesting. Just before we get to prologe, is
why did so many basically sub scale reaps actually get
off the ground in the first place. Was it just
because it was tam made cheap money, or was it
(07:44):
because I noticed that a lot of it's very niche
if you go back, it's like, you know, doctors, that
sort of thing. Lots are different and I'm just wondering
what it was that made it, I guess, feasible for
these companies to launch kind of essentially very tiny portfolios.
Speaker 2 (08:00):
Yeah, it's a good question, and the answer to that
would sort of vary with you know's there's many different
stories behind each kind of different and different state. But
if you take for example, Unite, they are the UK's
biggest public shredded student landlord. Now, twenty years ago, student
housing was sort of non existent as an institutional asset class.
(08:21):
It was really wasn't really a thing. Unite they managed
to raise a small amount of money ipode and they've
really ridden this huge wave of investment into higher education
accommodate or accommodation for students and have done fantastically well.
And it's developed from what was an incredibly obscure niche
asset class is now quite a mainstay real estate investment.
(08:42):
You know, you look at look at Blackstone in the
world's biggest real estate investor. Their single biggest sort of
bet in UK real estate is in student housing. So
it's become this very mainstream asset. Now that's a great
story if you were there in the early you know,
right at the start with Unite, you've done fantastically well
it albeit the last couple of years maybe less so.
So there's been lots of you know, enterprising people who've
(09:03):
gone right, I think this sector or that sector is
going to be the next big thing, so they've maybe
raised a bit of capital and then for what reason,
it hasn't quite worked out. Again, some of it is timing.
You know, we saw after twenty twenty two when rates
blew out, you know, all the reachshare prices collapsed. There
were people who were then going out talking to investors,
going right, this is the start of a news cycle,
this is the time, let's raise some capital. But the
(09:24):
trouble is, you know, we then had other shocks that
then meant that those companies then maybe they did list
they raised a small amount of capital, but then very quickly.
They were trading at a discount and then they can't
raise any more capital and they're kind of stuck. And
so we just had lots and lots of these minnos
who did manage to get off the ground, but then
never never got any further and they've just been consolidated. Basically,
(09:44):
all these subscale players have started to be consolidated.
Speaker 1 (09:47):
Yeah no, and that makes a lot of sense. So
I's a consolidation that takes is to you that can
the deal with the D So talking through Sacrel is
the biggest real estate investment trust less than the UK,
and it's it's a top. It's in the Footsie fifty,
so it's the top by end of the Footsie one hundred.
So it's a big, big company joint talk is through
what it does and more. The dealers weep at all lugers.
Speaker 2 (10:10):
Yeah sure, yeah, I mean they are there would be
you know, Crown Jewels of UK probably traded real estate
and actually their their origin story itself is quite interesting,
particularly when it comes to M and A. But so
they they are principally a warehouse landlord. They rent out
warehouses to you know, various different types of industrial occupies
and increasing in these days to online retailers and people
(10:31):
like that. They so historically commercial real estate, you would
have set the three big sectors where offices, retail and warehouses,
and offices in retail would have been the kind of
twin aristocracies, and sheds would have been the like the
unsex habit sorry sheds being what people in commercial real
estate call warehouses. And so for your big pension fund,
it would maybe and this is very crudely speaking, maybe
(10:53):
they would have had forty percent of the portfolio offices,
forty percent in retail and twenty percent in warehouses. Now
these days a you know, that's the allocation has been
completely upended and is way more diverse. But the big
story has probably been the massive reduction in the allocation
to retail and the massive increase in the allocation to
industrial and warehouses and logistics because of the rise of
(11:15):
online shopping. The rental growth has been unbelievable. Seagro previously
known as Slower States exactly reflecting their sort of prime
asset to the west of London, very popular place for
warehouses and these days increasing the data centers and we'll
come on too, that they did a very very well
(11:36):
timed deal. Just during the GFC they bought a company
called Brixton, which is the sort of a peer of theirs,
which was very very over levered, as were they all
at that point, and it had a lot of vacancy
in its portfolio. They managed to buy them in about
two thousand and nine pretty cheap, basically rescued them. And
what that meant was that then sort of significantly expanded
(11:56):
their portfolio and they had a lot of space to
let just as the e commerce story was just kind
of starting to take off, and that would be a
few years before that really became clear. But basically over
the last ten to fifteen years they have benefited massively
from that, just all this extra demand not only from
Amazon but also from you know, conventional retailers who've gone
what's known as omni channel and now do online and
(12:18):
physical retail. So that is that's the sort of backbone
of their business, not just UK, big portfolio in Europe
as well. Then over the last several years, the story
has evolved, you know, the really hot sexy area within
the world of industrial logistics became what's known as kind
of last mile or urban logistics, and those are the
small warehouses near near our houses, which retailers, which are
(12:40):
really sought after by people who want to deliver to us.
Because fine, if you're talking about the UK and you're
you know, big retailer John Lewis you know, or Amazon,
you probably but your massive, massive warehouse, your mega shed,
you put that somewhere in the Midlands near the M one.
Speaker 1 (12:55):
This is big box.
Speaker 2 (12:58):
Yeah, So you drive up the M one past North
and you'll just see all of which is where I
grew up. You see all these huge, huge warehouses and
they're the ones that are designed to kind of serve
the whole country, so you can drive anywhere within eight
hours from there, which is how long drives are allowed
to drive. So ideal place to put it. But that
doesn't really help with you know, your same data delivery
or your next day. So what then Amazon or their
(13:19):
peers need is lots of little warehouses very close to
where we live. Urban logistics and the rents for those
have gone absolutely through the roof, partly because they're competing
for space. You know, live in cities like London, there's
not enough housing, it's not enough all sorts of things.
So all of those are under pressure from other uses.
So even if you you know, if you own one
of those and you're struggling to rent it, which you
(13:39):
know in the current market is quite unlikely, but even
if you were struggling to rent it as a warehouse,
well you can probably make a lot of money from
converting it to residential. So that subsector has done very well,
and again Secret has got quite a big portfolio there.
And now the future story for Seagro is the data
center part, which is something that they've just sort of
relatively tended to be started to talk about over the
last few years, may be a bit more vocally over
(14:01):
the last year or two, where they have a lot
of what's what's called powered land, so they have these
sites that have access to power, which is the critical
thing when it comes to data centers. And as mentioned,
they have a lot of these, a lot of land
in West London in Slough which is actually key corridor
for a lot of this stuff. So there's loads of
potential to build data centers on land that they own,
(14:24):
some of which you know previously would have been warehouses.
So if you're a warehouse landlord and all of them
have been doing this, you've been going through your portfolio
the last couple years. Going Hm, this was a warehouse
that I was renting out for tanquedd at square foot
to some you know company that makes widgets. Actually it's
got power. I could convert it to a data center
and maybe a hyperscale will take it and pay me
a hell of lot more to pounds of square foot.
Speaker 1 (14:44):
So this is basically stuff that's just readly egal as
data centers rather than they haven't actually they don't all
in any data cent.
Speaker 2 (14:51):
Yeah, well so they have a small, very small amount
of kind of operational data centers. But it's basically it's
it's it's a development story. It's a powered land story.
And what Segro and some of their peers have been
doing today is that they're not data center specialists. They
haven't got a long track record of building this stuff.
So they've either been partnering with data center specialists or
sort of just developing stuff to to sort of shell
(15:15):
and court, so to speak, and then a specialist comes
in and does does you know some of the more
technical stuff. Now, as time goes on, they might acquire
that expertise, they might look to take on some of
this data center development directly. Themselves that we'll see how
that story evolves. But that is one of the things
that's kind of central to this debate about whether or
not pro logist is interested in Segro is you know,
(15:35):
at fair value.
Speaker 1 (15:44):
Sole logists come along. It's an all shared deal and
saw but basically if you're a secret shared order, you'll
get a bit of the convened entity. And what is
it that the current place is roughly eat pooon something other,
isn't it? Yeah, well did it above name pounds? But
because the ship places have changed.
Speaker 2 (16:04):
Exactly, yeah, so when they initially so it's well, interestingly,
religis approached. Segos board made proposal, Seagros board unanimously rejected
it just then basically immediately went public and said we're
going to tell the market we've made this proposal to
so they didn't go back and make another offer, which
you know, I think is interesting in itself. That proposal
(16:24):
at the time valued Sigarette about nine twenty five pence
a share, which when you know, is basically exactly in
line with Seagro's nasset value, their AAV their last reported one.
So essentially, you know, we will pay you Secro shareholders
what the company says the assets are worth and given
that the company at the time was trading at about
twenty percent discount to its NAV. Okay, that's a twenty
(16:45):
percent premium to the to the undisturbed share price now
secret obviously a midily turned around and go, well, hang
on a second, our share price has been walloped by Iran.
And actually, if you compare it to you know, the
share price pre Iran, it's not a very hefty premium.
And also the NAV it's quite a conservative, backward looking
sort of measure. Yes, that doesn't ascribe a huge amount
(17:08):
of value to the sort of potential future earnings in
our development pipeline.
Speaker 1 (17:12):
You're not placing then the data cent at least not
exactly exactly.
Speaker 2 (17:18):
So Segro, as part of its defense today, has come
out with a document or with valuations done for it
by CBRE, trying to kind of show the value that
they think is there the future earnings that there will
be from their from their data center pipeline. And you know,
wouldn't you know it? It's a lot.
Speaker 1 (17:37):
It's a NOV plus optimism take off.
Speaker 2 (17:40):
Yes, yeah, And to be fair to Seegro, this, you know,
this is not just purely hope value. There are different
ways of assessing real estate, and actually this deal kind
of perfectly highlights it because the UK, you know, arguably
and maybe a little bit anachronistic, we still tend to
think about NAV as a sort of key metric for
understanding real estate value and how we talk about roots
(18:02):
and revaluations. Although a lot of analysts would you tear
their hair out and say, please don't we do when
we when we have these deals, we talk about you know,
is it a discount? Now? Is it?
Speaker 1 (18:10):
Would analysts fear?
Speaker 2 (18:12):
So we focus more on earnings, which is how the
US do actually value their companies. So because I immediately
did this when you know, when the deal was well,
when the proposals announced that, right, so you know this
is roughly in line with NAB. How are the peers
in the US trading Well, you can't, you know, they
don't publish their NAB in the same way. But what
(18:33):
you can say they focus on earnings. They focus on
you know, f FO and metrics like that, funds from operations.
What you can see is particularly the data center landlords
in the US, digital realty next, people like that are
trading on really really elevated multiples to earnings, which you know,
it's not an apples to apples thing, but I think
it's fair to say they would essentially be trading at
(18:56):
a big premium to NAB, which is kind of the
market awarding a lot of hope value there. And you
do see that in the UK sometimes, you know, when
when the stock market decides right, you know we're at
the start of cycle, we can see that values are
at the bottom and they're about to go up. You know,
hopefully rents are about to go because no one's built anything.
(19:17):
The sector will sometimes then traded a slight premium, and
then Segre itself was trading at a bit of a
premium for a few years before, which was you know,
to do with the fact that warehouse there was a
scarcity of warehouse space. Rents were going up very very fast,
so the market was willing to price in a bit
of that future growth.
Speaker 1 (19:35):
Then it does feel a little bit like that classic
UK US valuation go up more broadly, and you know,
all the takestocks went less than the US because people
actually put appraisal on them. The feel is more reflective
of the potential, etc. I mean, that's interesting. We don't
know what will happen with there still one or the
(19:56):
other that's clearly in progress. But again going back to
fake this is the biggest street in the in the
UK by quite a long week. It's like a fete
of the sector or something like that accounts for by
market value. How much more consolidation can thus be left
in the sector if you're later at this point a.
Speaker 2 (20:14):
Really interesting question. There was a bit of a sense
that it had maybe been slowing down slightly from a
somewhat frenetic pace. But that said, I mean a be
interesting to see what impact this deal were it to happen,
you know then has and actually also in terms of
you know, potentially some some new companies coming to market. Yeah.
Bloomberg reported the other day that Blackstone has done some
(20:36):
very initial investor meetings on a company called Indurant, which
is one of its portfolio companies, which owns a lot
of UK warehouses, which rest I see, you're able to
disappear as a publicly traded the UK name.
Speaker 1 (20:48):
Maybe there'll be a new one.
Speaker 2 (20:51):
Yeah, Well, this is not something to be clear that
we're reporting is going to happen anytime particularly soon, but
you know, very.
Speaker 1 (20:57):
Very early there is the glimmerings of a potential.
Speaker 2 (21:00):
Yes, but if we go back to what we were
talking about earlier, and you know cost and you know
that being a driver of consolidation, there's there's clearly there's
a lot more to be done. Right, We've got multiple
For example, let's take London offices where you've got two
London office routes that you know are both arguably still
(21:21):
somewhat subscales. That'd be great Portland and derwant London. You know,
for many, many years has been speculation about well, could
they do something? Would they do something? Now obviously neither
management team is going to be terribly incentivized to do
that and you know, do themselves out of a job.
But there's there's that as an opportunity. You've got some landlords,
you know, trying to pivot into different sectors and again
(21:41):
that potentially an opportunity there to sort of take out
subscale businesses into those in those new sectors that they
want to get into. And you know, again today what
do you know, Trump talking about the Iran c is
far being over straight away all the real estate stocks
have sold off again, there'll be some more opportunity to
stic for evate equity capital wizing in the wings, if
(22:02):
that is to persist in those discounts blow out again. Yeah,
there's several UK rates that are still triding it really
quite massive discounts to their to their reported asset value.
Speaker 1 (22:11):
I mean, I do think this is and I guess
this must be frustrating for people in the sector. But
at the same time, if you are an investor, kind
of private investor, and obviously nothing on this podcast is
a recommendation or anything like that, if you're of the
view that interest rates in the UK are probably are
possibly going to come down, or that the market is
(22:33):
overly pessimistic about the direction of rates rather thinks are
going to keep going up, then rates are fairly interest
rates sensitive sector and a fairly obvious way you play
those hunches one way or the other. But beyond that,
there is also there is quite as you say, most
of these are trading that fairly solid discounts to their
net asset value. It's true the sectory, and I from
(22:56):
a value point of view.
Speaker 2 (22:58):
Yes, there's a whole load of different ways you can
slice it and die it. But basically the UK sector
right now is on a massive, massive sale. And if
you're willing to take a view that probably we are.
You know, the direction of rates is more likely to
be steady or down than it is up. Then, you know,
then that would be a by signal. There's also you know,
(23:18):
it's not just interest rates. The actual value that management
teams bring here is supposed to be on the operational side.
So in terms of increasing rents, increasing earnings, well, that
side of the ledger actually looks pretty positive for the
reason being that, you know, going back even further, we've
had Brexit, then we had the pandemic, then we've had
(23:39):
you know, runaway inflation, so a whole series of bad shocks,
which kind of means across most sectors, no one's really
built very much for ten years plus now in the UK,
whether that's offices, you know, retail, no one's built anything
because we had far too much of retail. Warehouse development
has still gone on, but even a lot of that
was kind of upended by the end of the cheap money.
(24:00):
So there isn't there's certainly not oversupply in many if
any sectors, and in quite a few of the sectors
there's really quite chronic undersupply, and assuming that the economy
you know, Okay, the economy has not been going great guns,
but assuming it sort of continues to just about take along,
that should mean that rental growth is pretty robust, and
therefore that should be a good growth opportunity.
Speaker 1 (24:22):
Yes, in the credit and the micro side. Because the
other I think that is something we haven't really talked about,
but because the other big issue for vestas is if
you're a freie, this can be a receation. That means
lots of empty premises, means lots of can you the
landlord's carrying a lot it can avoid basically, And that's
actually something that we haven't really seen because walking from
(24:42):
home didn't end up being permanent. And you know, we
didn't have a massive recession at any point over the
last five years, despite all the kind of expectation that
we would, so the actually, as you see, the actual
operational side of the industry has been pretty robust.
Speaker 2 (24:57):
Yeah. I mean, the other thing to say on that
point is if you go to the you know, the
last really painful recession, I mean, putting the pandemic to
one side that we had here in the financial crisis. Yes,
obviously there were huge credit issues within within landlord's portfolios
in terms of their tenants. But even then vacancy didn't
actually get that much. I mean, yes it got worse,
(25:19):
but it wasn't existential. What the real problem was the
fact they were all massively over leveraged, and that was
the big issue. That they have learned their lesson. The
UK reads have learned their lesson, and as a sector
they are not generally speaking, significantly over leveraged now. They
are generally carrying pretty conservative levels of leverage, which you know,
even if there were to be some other significant shock
(25:40):
that came along now which suddenly you know, pushed real
estate values down significantly. Again, they've still got a lot
of headrooms, so that kind of major threat to the
sector they've largely dealt with.
Speaker 1 (25:51):
Yeah, it's pretty resilient. Well, Jake, that was really really useful.
Really appreciate your team, and thanks very much for coming.
Then again, I'm sure we'll get you back in when
we find out what actually happens with this secret deal.
Speaker 2 (26:04):
Yeah, yes, well I'm sure it'll keep me busy for sometimes.
But thank you so much for having me.
Speaker 1 (26:13):
Thanks for listening to this week's Merton Talks Your Money.
If you like a show, rate reviewing, subscribe whatever you
listen to podcasts. Also, be sure to follow me on
Exit Joint and does host Effect. You can find Jack
on LinkedIn. The Family saw the most exciting of all
social media outlets. This episode was produced by Summer, Sadi
and Moses and questions and comments on this show and
all the shows are always welcome. Our show email is
(26:35):
mereon Money at Bloomberg dot in net.
Host
Merryn Somerset Webb
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