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Private equity firms are circling the UK’s beleaguered listed real estate trusts. The interest could help breathe life into the sector after years of underperformance.
Assura, which specialises in GP surgeries and other healthcare buildings, on Monday said it had received an indicative takeover proposal from KKR and Stonepeak Partners and was minded to recommend a deal. Meanwhile, Blackstone and Sixth Street have made several proposals for Warehouse Reit. Executives at other firms are nervously trying to work out who among them might be next.
There are two reasons private equity is circling. For one, conditions have turned a corner after a multiyear downturn. British Land chief Simon Carter, for example, told investors at a Citi conference last week that some of its businesses were seeing their strongest demand in the past decade.
The improvement has yet to show up in the stock market, which creates an opportunity for nimble buyout firms to swoop. The FTSE Nareit UK Total Return index, which tracks UK-listed real estate investment trusts, has fallen about 30 per cent since interest rates started rising in late 2021. British Land is set to drop out of the FTSE 100 later this month.
True, some companies have long-term questions to answer around topics like the future of office space or the impact of new environmental regulations. However, the poor performance has been almost indiscriminate, despite the fact the Bank of England is cutting interest rates, building valuations have stabilised and in some cases started to rise, and shares are trading well below asset values.
There’s not a great deal property executives can do to change their fortunes for the better. Bond yields, a big driver of real estate company valuations, are not playing ball. Gilt markets have already been caught up in two international shocks this year — one global sell-off that began in the US in January, and another last week that spilled over from Germany.
A broader shift in investor sentiment about the UK economy is also on property companies’ wish list, but unlikely to be granted quickly.
Property companies could, perhaps, sell more individual buildings. After all, real-world trades can reassure investors that property portfolios really are worth what companies say they are. More deals like the sale of half of Citadel’s new City of London office tower, agreed in January, would help soothe investors who doubt published asset values. Here listed groups have at least some influence, although it would take time to build momentum.
The upshot is that there is not much to impede private equity’s assault. Assura rebuffed several previous efforts by KKR before the latest improved offer. But the longer valuations remain in the doldrums, the more bids are likely to emerge, and the harder they will be to resist.