Things have gone from bad to worse for UK REITs this year. According to analysts at MSCI, October was the worst month on record for listed UK real estate. Properties monitored by MSCI’s index, which records monthly valuation changes for directly held property investments, posted an average return of -6.5%.

But that is nothing compared to the fall in value of the 12 largest UK REITs that I wrote about in the May issue of PIN. In less than eight months, these REITs have fallen in value by around 30%, taking their total market cap from £55bn in early April to £38bn at the end of November.

However, this is in line with the average for all UK REITs for the past year and in the table below you can see how poorly all UK REITs have performed over the past 1, 3 and 5 years. The data, provided by Simply Wall St on 7 December, looked at the returns from 53 of the largest UK REITs and split them into sectors. Overall, the average price-to-earnings (P/E) ratio for UK REITs has fallen from 18x in January 2020 just before the pandemic started to 5.5x on 7 December. The big surprise this year has been the huge drop in the share prices for industrial REITs after a long run of rising prices.

So, will prices rebound or is this the beginning of a long downward spiral for UK REITs?

Steep discounts and favourable long-term growth drivers
At the end of October, Oxford Economics stated in a research briefing that, while the risk of distress has risen, REITs now look well positioned. The company stated: ‘Policymakers’ desire to continue tightening until excess inflation is fully removed from the economy is starting to clash with the need to maintain financial stability, raising the risk of financial market distress.

‘REITs are likely to remain under pressure in this environment but look well positioned due to the combination of low leverage, limited near term debt maturities, and steep discounts to NAV (net asset value).’

‘REIT pricing remains dependent on inflation and interest rate movements. We expect global inflation to ease during 2023, with most central banks remaining restrictive until their targets are approached in early 2024. These timings would allow REIT pricing to recover next year. That said, there’s great uncertainty over the impact of higher rates on financial markets, and prices could fall further in the near term.’

Now let’s look at each of the REIT sectors in more detail, starting with Industrial.