So much for hopes that Britain’s fledgling Reits market would take off. There was a lot of hype before the UK introduced real estate investment trusts in January, but the reality could not be further from the hype, according to the Wall Street Journal which reports that UK Reits are the worst performing in the world so far this year. Their negative returns are leading analysts to downgrade the sector and call the end of a four-year boom in British commercial property, the Journal said.
The UK is the only country where the Reit market as a whole is trading at a consistent discount to the net value of the underlying property assets, the industry benchmark for valuing a property company, says the Journal.
Reasons for their poor performance include fears of rising UK interest rates and speculation about the beginning of a downturn in the UK’s property market, which have prompted investors to reduce their exposure to property. Unlike the US, Australia, Japan and Hong Kong, as well as European countries including France, Greece, the Netherlands and Belgium, which all have more mature Reit markets, the UK’s market is brand new.
Traditionally, Reits trade at a premium to net asset value, reflecting the vehicle’s tax-efficient structure. They trade on an average premium to NAV of about 35 per cent globally, with national variations. But UK blue-chip British Land trades at a 12 per cent discount. Its FTSE 100 peer Land Securities Group PLC trades at an 8 per cent discount and Liberty International trades at a 5 per cent discount. In contrast, in France, the premium is as much as 50-60 per cent.
As Reits must distribute 90 per cent of their property-rental income to shareholders in the form of dividends, investors tend to expect higher dividend yields. But UK Reits pay lower dividends compared to earnings than their global peers, and combined with the fear of interest-rate increases, is ensuring the sector continues to trade at a discount to NAV.
Overall UK commercial property returns, meanwhile, have fallen 8.3 per cent in the year to date, according to the FTSE EPRA/Nareit Global Real Estate Index for April released last week, which is a global benchmark of Reit performance. The index comprises the largest and most heavily traded real-estate stocks in Asia, Europe and North America and included 313 stocks at the end of April. The UK is the only country tracked world-wide with negative year-to-date returns, the Journal said.
The FT, however, said the new vehicles are likely to emerge as the “preferred vehicle of choice” for less risk-taking investors who may prefer a higher, more predictable dividend than they have had in the past.
