Is the most hated asset UK Reits?

Although the market is still completely unimpressed, recent updates from UK Reits appear to be improving

Following the Covid pandemic five years ago, a number of real estate investment trusts (Reits) in the United Kingdom suspended or reduced their dividend payments.

There were pessimistic forecasts that the demand for shops and offices would decline so much following the pandemic that payouts would never fully recover. The majority of Reits have seen their income hold up far better than anticipated, despite the fact that changes in work and leisure have had an impact on real estate.

The highs and lows are summed up by the two large, diversified Reits. In 201819, Land Securities paid out 45p55p per share; in 2019 - 2020, that amount dropped to 23p2p. This year, it should pay 40p5p. British Land dropped from 31p to 47p to 15p to 04p before rising back to 23p.

However, the majority of share prices have returned to or even fallen below their 2020 levels. This is not only the case in the office sector, where it makes sense that many investors are still wary. It is applicable practically everywhere, and the explanations for this are obvious.

Are UK Reits too pessimistic for investors?

Since 2022, rising interest rates have raised the cost of debt used to finance the majority of real estate transactions and raised the returns available to investors elsewhere (such as government bonds). Because of the decline in commercial property values, Reits are frequently announcing valuation write-downs. Even if rents continue to come in, that never makes for interesting news stories.

In a double whammy, the Reits' own payouts appear less attractive due to higher yields elsewhere. Land Securities yielded around 4.5 percent prior to COVID, but it now yields 7.5 percent. The 10-year gilt has increased from roughly 0point 75 percent to 4point 75 percent during the same time frame.

Even so, you may be wondering if investors are too pessimistic after seeing the latest updates. Shaftesbury, the company that owns sizable portions of the West End in London, reported a net asset value total return of 7% for 2024. Over a 12-month period, the shares have decreased by 8%. Derwent, an expert in London offices, reported steady leasing trends and stable values. Over the year, it has dropped by 13%. Logistics companies that were market favorites until early 2022, like Segro, Tritax Big Box, and LondonMetric, reported mediocre results, but their stock is still down. Similarly. There may be increasing tailwinds, but they are not yet apparent.

With the possible exception of the industry, where private equity is buying out Reits or acquiring them. Blackstone has bid for Warehouse Reit, and KKR has bid for the healthcare facilities group Assura in the last month. It's obvious that experts, at least selectively, find some value in UK real estate.

They could be mistaken, of course, because real estate is cyclical and experienced investors make poor decisions during every cycle. The announcement that Land Securities now intends to sell £2 billion worth of offices in order to invest in residential real estate is difficult to comprehend; selling cash-generating assets close to a probable market bottom in order to finance ambitious new developments for a totally different kind of tenant under a government eager to get involved in the housing sector seems like a risky move that may not be in line with what shareholders want. However, given these levels and the improving news, the iShares UK Property ETF (LSE: IUKP) sector tracker appears to be a good contrarian investment.

IShares UK Property ETF.

(Photo courtesy of London Stock Exchange).