REITO

After Covid struck five years ago, several UK real-estate investment trusts (Reits) suspended or slashed their dividends.

The two big diversified Reits sum up the highs and lows. Land Securities paid out 45.55p per share in 2018/19, falling to 23.2p in 2019-2020. It should pay 40.5p this year. British Land fell from 31.47p to 15.04p; it’s now back to 23p.

Yet share prices are mostly back to where they were in 2020 or even lower. This isn’t just true for the office sector, where one can understand why many investors remain cautious. It applies almost across the board, and the reasons why are clear.

UK Reits: are investors too bearish?

For a double whammy, higher yields elsewhere make the Reits’ own payouts look less compelling. Pre-Covid, Land Securities yielded about 4.5%, now it yields 7.5%. Over the same period, the 10-year gilt has gone from about 0.75% to 4.75%.

Still, look at recent updates and you wonder if investors are too bearish. Shaftesbury, which owns large swathes of London’s West End, reported a 7% net asset value total return for 2024. The shares are down 8% over 12 months. London office specialist Derwent reported stable values and solid leasing trends. It’s off 13% over the year. Logistics firms such as Segro, Tritax Big Box and LondonMetric – which were market darlings until early 2022 – reported okay results, yet the shares remain in the red. And so on. Tailwinds may be picking up, but they’ve yet to be noticed.

Of course, they may be wrong – real estate is cyclical and in every cycle, experienced investors get big calls wrong. Indeed, the news that Land Securities now plans to sell £2 billion of offices to invest in residential property is hard to understand – selling cash-generating assets near a likely market-bottom to fund ambitious new developments for a completely different type of tenant under a government that is very keen to intervene in the housing sector feels like a bold move, and not necessarily what shareholders want. Still, at these levels and with news improving, the iShares UK PropertyETF (LSE: IUKP) sector tracker looks like a promising contrarian play.

((Image credit: London Stock Exchange))

This article was first published in MoneyWeek’s magazine.