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An Overview of The Largest REITs in The UK

Peter Hemple begins a new bi-annual review of the UK REIT market

We have published several articles on real estate investment trusts (REITs) in PIN before, most recently in September 2021. In the last article, I highlighted how REITs have continued to perform well when there have been previous waves of globally rising interest rates. But that article was written seven months ago, which in the 2020s may as well be seven years.

Just a few months ago we were facing consumer price inflation (CPI) in the UK of 2% and oil had surged past $70/barrel, which all seemed quite inflationary…now we glance back and think ‘how quaint’. Last September, the Bank of England was still saying that it will keep the base rate low for the foreseeable future, even if UK inflation catches up with the rest of Europe and hits 3%. Now though, thanks to ‘mad Vlad’ and his nostalgic yearnings for the reformation of the Soviet Union, the CPI in the UK hit 6.2% in March and is almost certain to go higher this year. The price of a barrel of oil has also soared by another 50% since September 2021 to just over $100/barrel at the time of writing.

As stated last year, the prospects for REITs look good when inflation rises, pushing rents higher when it is time for a lease renewal, which eventually results in higher capital values. However, if REITs looked like a good investment back in September, they look even more appealing now so in this article we will dig a bit deeper into specific UK REITs that are listed on the London Stock Exchange (LSE).

Starting with the dirty dozen
More than 50 UK REITs are listed on the LSE, which you can invest in at the click of a button. Their market caps range in size from over £16bn, down to around £5m. In this article, which is the first in a bi-annual REITs review, we will focus on the 12 largest UK REITs, which have a combined market cap of more than £55bn. As the series continues, we will review the performance of these large REITs but also feature specific sectors and look at all the REITs in those sectors in more detail.

Before we look at specific companies, Mark Unsworth associate director at Oxford Economics, gave his five-year forecast for commercial property within the REIT sector earlier this year. He said: “Global real estate returns are looking healthy over the next five years, providing a strong relative performance versus bonds and equities. We forecast total returns for REITs to average 6.5% to 7% annually over 2022-2026, significantly above bonds and equities, which are projected to return 0.7% and 2.5% per annum, respectively. We also expect global economic expansion to support real estate income growth while structural forces keep long-run interest rates low.”

Regarding specific commercial property sectors, Unsworth said: “We have a high conviction on the industrial sector, expecting global returns of nearly 9% pa over the next five years. The structural tailwind provided by e-commerce provides compelling support for demand. At the other end of the spectrum are hotels with returns of 5.5% pa globally over 2022-2026. International tourism is set to be slow to recover – reaching 2019 levels by 2024 – while business travel could lag as companies examine both the cost and carbon footprint of business trips more closely.

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