Potential consequences of a significant increase in REIT mergers and acquisitions: Is the UK market paying the price?
Private equity firms have once again set their sights on UK Real Estate Investment Trusts (REITs), launching bids that they claim offer a significant premium over recent share prices. However, as merger and acquisition (M&A) activity within the sector continues to climb, concerns about these bids potentially diverting attention from the true value of these assets have been brought to light by Matthew Norris from Gravis.
Matthew, who serves as the Head of Real Estate Securities at Gravis, highlighted a recurring trend where bidders present hefty premiums over recent share prices as an attractive proposition for investors, framing it as a surefire victory. This pattern was evident in cases like Assura and Warehouse REIT, where private bids from KKR and a consortium of private equity firms respectively focused on historical share prices, sidestepping discussions on valuation metrics and future value creation.
With the recent rate cuts by the Bank of England, stable rental demand for prime buildings, and strengthening property fundamentals, numerous REITs are on track to realize substantial gains. Consequently, both strategic and financial buyers are swiftly maneuvering to secure deals. Despite the apparent enthusiasm, Matthew cautioned that the premium offered above previous share prices could be misleading and may overshadow the long-term earning potential of these companies and the value of the underlying assets.
Drawing parallels to the game of Monopoly, Matthew mentioned that monopolizing ownership of a color group of properties grants players a significant advantage in setting rents, facilitating development, and unlocking greater value. Similarly, in the realm of corporate takeovers, full control commands a premium.
Private equity firms are honing in on REITs due to their ability to inject substantial capital into fully operational, high-quality portfolios that often boast strong brands and robust development pipelines. These acquisitions not only promise appealing returns but also provide an expedited path to fee generation due to their scale.
Matthew stressed the importance of adopting a forward-thinking approach, underscoring that UK REITs are currently trading at significant discounts to their net asset value, averaging at 29% as of February, compared to the ten-year average of 17%. This market trend has created an opportunity that private equity firms are keen on capitalizing on.
When faced with offers, Matthew advocated for company boards to prioritize extracting an ownership premium that aligns with the advantages of full control and the genuine potential of the business. Failure to do so, he cautioned, could result in the loss of top-tier REITs to private equity entities poised to reap substantial benefits.