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The UK's Shrinking REITs Sector Is Still Attracting Buyers · Merryn Talks Money

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Speaker 1: Bloomberg Audio Studios, Podcasts, radio news. Welcome to Merton Talks
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Speaker 1: Your Money, the personal finance edition of MERN Talks Money,
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Speaker 1: and these bonus podcasts we talk about best strategies for
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Speaker 1: making the most of your money. I'm join Stepwick, senior
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Speaker 1: reporter for Bloomberg and author of the award winning Money
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Speaker 1: Distilled newsletter. Mern's out today, but join me in the studio.
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Speaker 1: Very kindly is Jack Siddars, who is Bloomberg's team leader
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Speaker 1: covering real estate and European investing. Jack, thanks very much
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Speaker 1: for joining us today.
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Speaker 2: Thanks very much for having me.
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Speaker 1: So, just to give you an idea of what we're
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Speaker 1: going to cover, We're going to talk about what is
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Speaker 1: a rate a real estate investment trust. We're going to
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Speaker 1: run through an overview of what's been a hectic five
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Speaker 1: years for the sector in which it's basically halved in
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Speaker 1: terms of the number of that are on the UK
1:01
Speaker 1: stock market. Then we're going to talk about a particularly
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Speaker 1: a big deal that's going on in the reat sector.
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Speaker 1: The biggest UK listed has been targeted by a US
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Speaker 1: peer Jake's been doing before and very Keenley kind of
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Speaker 1: talked us about real estate investment trust. But just for
1:17
Speaker 1: listeners who are are new to the show, perhaps a
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Speaker 1: quickly means that what is a real estate investment trust?
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Speaker 2: Jack? Yeah, sure, thanks so well. Real estate investment trusts,
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Speaker 2: or routs as they're commonly known, are basically publicly traded landlords.
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Speaker 2: The ret regime came in just just after the global
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Speaker 2: financial crisis about about twenty years ago. And the idea
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Speaker 2: is that so, unlike a conventional listed landlord that can
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Speaker 2: kind of do whatever it likes with the money it makes,
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Speaker 2: a distributes the vast majority of its earnings in the
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Speaker 2: form of dividends to shareholders. So mostly it owns investment properties,
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Speaker 2: properties that are rented out to companies that generate a rent,
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Speaker 2: and it pays those rents out in the form of
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Speaker 2: dividends showers. But they'll also do most of them will
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Speaker 2: do a little bit of developments. They have a development
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Speaker 2: portfolio as well, and that might be where they make
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Speaker 2: their sort of development profits from building buildings of renting
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Speaker 2: them out and then selling them on.
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Speaker 1: Yeah cool. So yes, it's all about getting the rent
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Speaker 1: and paying the devidanzo and they get various tax kind
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Speaker 1: of conversation.
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Speaker 2: Yeah, the tax is key, I should should have so Yeah,
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Speaker 2: so that it's it's a sort of tax advantage structure,
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Speaker 2: so that you're not paying kind of double taxation. So
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Speaker 2: they have some exceptions that the other landlords don't don't
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Speaker 2: benefit from.
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Speaker 1: Obviously, it's been an absolutely wild five years for most
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Speaker 1: kind of investments. But obviously with things like COVID and
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Speaker 1: the pandemic and working from home and the impact on
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Speaker 1: office buildings and otherstic it's always through was harmed in
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Speaker 1: the sector over the last five years because as I
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Speaker 1: understand it will certainly haven't. I've seen various statistics. They
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Speaker 1: see that roughly ety oil and reaps and the uklist
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Speaker 1: did a bit five years ago and knew that it's
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Speaker 1: going on that we don't have about forty perhaps even
3:07
Speaker 1: slightly at this you're talks through way that's harmed or
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Speaker 1: who that has come about.
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Speaker 2: Yeah, of course with it, and there's there's a lot
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Speaker 2: to unpack there. If we start just talking about real
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Speaker 2: estate commercial real estate very broadly, and then we can
3:18
Speaker 2: talk about the particular issues that have impacted the listed
3:20
Speaker 2: part of it in the resector in particular. But for
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Speaker 2: real estate, I guess probably the most important thing fundamentally
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Speaker 2: is interest rates and bond yilds. So if interest rates
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Speaker 2: in a time when interest rates were very very low
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Speaker 2: and therefore bond yields are very very low, real estate
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Speaker 2: was seen as quite an attractive alternative in which to
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Speaker 2: allok capital because it was throwing off a bit more yield. So,
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Speaker 2: even though yields got sort of squeezed lower and lower
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Speaker 2: and lower, and therefore real estate values pushed up higher
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Speaker 2: and higher and higher, it was still offering a kind
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Speaker 2: of premium over risk free rates, over government debt, over
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Speaker 2: corporate debt as well. Now, come twenty twenty two, the
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Speaker 2: sort of end of the cheap money era, risk free
3:59
Speaker 2: rates blow out, interest rates go up, bond yields go up,
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Speaker 2: all of a sudden. Real estate values had to adjust
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Speaker 2: to reflect that reality, because why are you going to
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Speaker 2: buy an a liquid building that is yielding less than
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Speaker 2: a basically risk free government bond. You're not, so that
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Speaker 2: the value has to go down. The yield on the
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Speaker 2: property has to go up in order to make it attractive.
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Speaker 2: So that is the single most kind of important thing
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Speaker 2: that has happened to commercial real estate as a whole
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Speaker 2: over the last five years. Now you mentioned there's then
4:26
Speaker 2: been a whole bunch of other different sort of structural
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Speaker 2: issues within the different types of commercial real estate that
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Speaker 2: have also had a huge impact. So we had COVID
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Speaker 2: impact on offices or bit that, you know, maybe a
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Speaker 2: lot of that was more sentiment than reality. We've had
4:39
Speaker 2: the rise of online retail and how that's affected the
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Speaker 2: shopping center or conversely, how that's affected the warehouse, so
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Speaker 2: very simply generally speaking, bad for shopping centers, good for warehouses.
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Speaker 2: So those sorts of factors are at play as well,
4:52
Speaker 2: but then for the reach sector in particular, so publicly
4:55
Speaker 2: traded real estate, and it's a funny kind of asset
4:57
Speaker 2: class because in theory it sort of should trade like
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Speaker 2: any kind of commercial property, but the reality is these
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Speaker 2: are publicly traded stocks and therefore their subject to kind
5:06
Speaker 2: of equity market volatility. So you mentioned that there were
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Speaker 2: dozens and dozens and dozens of uk uts, but lots
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Speaker 2: of them were quite small. And one of the problems
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Speaker 2: is it sort of doesn't necessarily take a much bigger
5:19
Speaker 2: team to run a publicly traded landlord that has one
5:22
Speaker 2: hundred billion in assets than it does one that has
5:24
Speaker 2: one billion in assets. So what that means is small
5:27
Speaker 2: routes are quite expensive to run, which is not great
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Speaker 2: for sheld. You've also then had the many and well
5:34
Speaker 2: documented issues with the UK market and the sort of
5:36
Speaker 2: general lack of liquidity in the UK market and UK
5:40
Speaker 2: assets generally trading at a discount. So all of these
5:43
Speaker 2: things have kind of compounded the issues that you know,
5:47
Speaker 2: all real estate, all UK real estate has had, but
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Speaker 2: publicly traded UK real estate in particular has been a
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Speaker 2: really unloved place for quite a long period of time. Now, now,
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Speaker 2: how have management teams reacted to that? And how of
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Speaker 2: opportunities investors reacted to that? A lot of deal making,
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Speaker 2: So to start with, you had a lot of public
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Speaker 2: to private deals. So private equity firms going, hmmm, I
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Speaker 2: can see that that RUT is trading at a big
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Speaker 2: discount to the sort of reported value of its properties. Therefore,
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Speaker 2: if I can offer shareholders a bit of a premium
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Speaker 2: to where the shares are trading right now, but still
6:20
Speaker 2: a discount or the value of their assets, well the
6:23
Speaker 2: shareholders are happy, and I'm happy because then I can
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Speaker 2: probably sell those assets on on the private market, and
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Speaker 2: if I get book value, I'm making good money. So
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Speaker 2: we had a whole load of public to private deals
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Speaker 2: by you know, the likes of Blackstone and Brookfield, et cetera.
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Speaker 2: But then more recently we've also had a whole load
6:37
Speaker 2: of deals of sort of peer to peer deals where
6:40
Speaker 2: I might be a retrading a discount, you might be
6:42
Speaker 2: a retrading a discount. But if we do a kind
6:44
Speaker 2: of all shared deal, it kind of doesn't really matter.
6:48
Speaker 2: It's good in theory for shareholders because then we have
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Speaker 2: a bigger asset based, bigger company, more efficient to run,
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Speaker 2: lower cost to run. Maybe we get into a bigger index,
6:55
Speaker 2: so we might go up into the you know, the
6:57
Speaker 2: foot of one hundred or and therefore we get more
6:59
Speaker 2: pasts of investment you know, white white port of shareholders,
7:02
Speaker 2: all of which is good. So that's been a huge
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Speaker 2: driver of consolidation within the sector, which you know, all
7:09
Speaker 2: of which has ended up where we are today with
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Speaker 2: the biggest rate in the UK. Now the subject to
7:14
Speaker 2: interest from the Goliath, the Godzilla of publicly traded real
7:18
Speaker 2: estate globally prologies.
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Speaker 1: Yeah, I mean, this is a massive deal. Is one thing.
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Speaker 1: One thing I just wanted to ask you about that.
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Speaker 1: I think your point about costs of managing our portfolio
7:29
Speaker 1: is really interesting. Just before we get to prologe, is
7:33
Speaker 1: why did so many basically sub scale reaps actually get
7:37
Speaker 1: off the ground in the first place. Was it just
7:40
Speaker 1: because it was tam made cheap money, or was it
7:44
Speaker 1: because I noticed that a lot of it's very niche
7:46
Speaker 1: if you go back, it's like, you know, doctors, that
7:50
Speaker 1: sort of thing. Lots are different and I'm just wondering
7:53
Speaker 1: what it was that made it, I guess, feasible for
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Speaker 1: these companies to launch kind of essentially very tiny portfolios.
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Speaker 2: Yeah, it's a good question, and the answer to that
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Speaker 2: would sort of vary with you know's there's many different
8:07
Speaker 2: stories behind each kind of different and different state. But
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Speaker 2: if you take for example, Unite, they are the UK's
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Speaker 2: biggest public shredded student landlord. Now, twenty years ago, student
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Speaker 2: housing was sort of non existent as an institutional asset class.
8:21
Speaker 2: It was really wasn't really a thing. Unite they managed
8:24
Speaker 2: to raise a small amount of money ipode and they've
8:27
Speaker 2: really ridden this huge wave of investment into higher education
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Speaker 2: accommodate or accommodation for students and have done fantastically well.
8:35
Speaker 2: And it's developed from what was an incredibly obscure niche
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Speaker 2: asset class is now quite a mainstay real estate investment.
8:42
Speaker 2: You know, you look at look at Blackstone in the
8:43
Speaker 2: world's biggest real estate investor. Their single biggest sort of
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Speaker 2: bet in UK real estate is in student housing. So
8:50
Speaker 2: it's become this very mainstream asset. Now that's a great
8:52
Speaker 2: story if you were there in the early you know,
8:55
Speaker 2: right at the start with Unite, you've done fantastically well
8:57
Speaker 2: it albeit the last couple of years maybe less so.
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Speaker 2: So there's been lots of you know, enterprising people who've
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Speaker 2: gone right, I think this sector or that sector is
9:05
Speaker 2: going to be the next big thing, so they've maybe
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Speaker 2: raised a bit of capital and then for what reason,
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Speaker 2: it hasn't quite worked out. Again, some of it is timing.
9:12
Speaker 2: You know, we saw after twenty twenty two when rates
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Speaker 2: blew out, you know, all the reachshare prices collapsed. There
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Speaker 2: were people who were then going out talking to investors,
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Speaker 2: going right, this is the start of a news cycle,
9:21
Speaker 2: this is the time, let's raise some capital. But the
9:24
Speaker 2: trouble is, you know, we then had other shocks that
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Speaker 2: then meant that those companies then maybe they did list
9:30
Speaker 2: they raised a small amount of capital, but then very quickly.
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Speaker 2: They were trading at a discount and then they can't
9:34
Speaker 2: raise any more capital and they're kind of stuck. And
9:36
Speaker 2: so we just had lots and lots of these minnos
9:38
Speaker 2: who did manage to get off the ground, but then
9:41
Speaker 2: never never got any further and they've just been consolidated. Basically,
9:44
Speaker 2: all these subscale players have started to be consolidated.
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Speaker 1: Yeah no, and that makes a lot of sense. So
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Speaker 1: I's a consolidation that takes is to you that can
9:52
Speaker 1: the deal with the D So talking through Sacrel is
9:56
Speaker 1: the biggest real estate investment trust less than the UK,
9:59
Speaker 1: and it's it's a top. It's in the Footsie fifty,
10:02
Speaker 1: so it's the top by end of the Footsie one hundred.
10:04
Speaker 1: So it's a big, big company joint talk is through
10:06
Speaker 1: what it does and more. The dealers weep at all lugers.
10:10
Speaker 2: Yeah sure, yeah, I mean they are there would be
10:12
Speaker 2: you know, Crown Jewels of UK probably traded real estate
10:16
Speaker 2: and actually their their origin story itself is quite interesting,
10:19
Speaker 2: particularly when it comes to M and A. But so
10:22
Speaker 2: they they are principally a warehouse landlord. They rent out
10:25
Speaker 2: warehouses to you know, various different types of industrial occupies
10:28
Speaker 2: and increasing in these days to online retailers and people
10:31
Speaker 2: like that. They so historically commercial real estate, you would
10:35
Speaker 2: have set the three big sectors where offices, retail and warehouses,
10:40
Speaker 2: and offices in retail would have been the kind of
10:42
Speaker 2: twin aristocracies, and sheds would have been the like the
10:44
Speaker 2: unsex habit sorry sheds being what people in commercial real
10:47
Speaker 2: estate call warehouses. And so for your big pension fund,
10:50
Speaker 2: it would maybe and this is very crudely speaking, maybe
10:53
Speaker 2: they would have had forty percent of the portfolio offices,
10:55
Speaker 2: forty percent in retail and twenty percent in warehouses. Now
10:59
Speaker 2: these days a you know, that's the allocation has been
11:02
Speaker 2: completely upended and is way more diverse. But the big
11:05
Speaker 2: story has probably been the massive reduction in the allocation
11:08
Speaker 2: to retail and the massive increase in the allocation to
11:12
Speaker 2: industrial and warehouses and logistics because of the rise of
11:15
Speaker 2: online shopping. The rental growth has been unbelievable. Seagro previously
11:21
Speaker 2: known as Slower States exactly reflecting their sort of prime
11:26
Speaker 2: asset to the west of London, very popular place for
11:29
Speaker 2: warehouses and these days increasing the data centers and we'll
11:31
Speaker 2: come on too, that they did a very very well
11:36
Speaker 2: timed deal. Just during the GFC they bought a company
11:40
Speaker 2: called Brixton, which is the sort of a peer of theirs,
11:42
Speaker 2: which was very very over levered, as were they all
11:45
Speaker 2: at that point, and it had a lot of vacancy
11:48
Speaker 2: in its portfolio. They managed to buy them in about
11:50
Speaker 2: two thousand and nine pretty cheap, basically rescued them. And
11:54
Speaker 2: what that meant was that then sort of significantly expanded
11:56
Speaker 2: their portfolio and they had a lot of space to
11:58
Speaker 2: let just as the e commerce story was just kind
12:01
Speaker 2: of starting to take off, and that would be a
12:03
Speaker 2: few years before that really became clear. But basically over
12:06
Speaker 2: the last ten to fifteen years they have benefited massively
12:09
Speaker 2: from that, just all this extra demand not only from
12:11
Speaker 2: Amazon but also from you know, conventional retailers who've gone
12:15
Speaker 2: what's known as omni channel and now do online and
12:18
Speaker 2: physical retail. So that is that's the sort of backbone
12:21
Speaker 2: of their business, not just UK, big portfolio in Europe
12:24
Speaker 2: as well. Then over the last several years, the story
12:28
Speaker 2: has evolved, you know, the really hot sexy area within
12:31
Speaker 2: the world of industrial logistics became what's known as kind
12:33
Speaker 2: of last mile or urban logistics, and those are the
12:35
Speaker 2: small warehouses near near our houses, which retailers, which are
12:40
Speaker 2: really sought after by people who want to deliver to us.
12:42
Speaker 2: Because fine, if you're talking about the UK and you're
12:45
Speaker 2: you know, big retailer John Lewis you know, or Amazon,
12:48
Speaker 2: you probably but your massive, massive warehouse, your mega shed,
12:52
Speaker 2: you put that somewhere in the Midlands near the M one.
12:55
Speaker 1: This is big box.
12:58
Speaker 2: Yeah, So you drive up the M one past North
13:00
Speaker 2: and you'll just see all of which is where I
13:01
Speaker 2: grew up. You see all these huge, huge warehouses and
13:05
Speaker 2: they're the ones that are designed to kind of serve
13:06
Speaker 2: the whole country, so you can drive anywhere within eight
13:09
Speaker 2: hours from there, which is how long drives are allowed
13:11
Speaker 2: to drive. So ideal place to put it. But that
13:13
Speaker 2: doesn't really help with you know, your same data delivery
13:16
Speaker 2: or your next day. So what then Amazon or their
13:19
Speaker 2: peers need is lots of little warehouses very close to
13:22
Speaker 2: where we live. Urban logistics and the rents for those
13:24
Speaker 2: have gone absolutely through the roof, partly because they're competing
13:28
Speaker 2: for space. You know, live in cities like London, there's
13:31
Speaker 2: not enough housing, it's not enough all sorts of things.
13:33
Speaker 2: So all of those are under pressure from other uses.
13:36
Speaker 2: So even if you you know, if you own one
13:37
Speaker 2: of those and you're struggling to rent it, which you
13:39
Speaker 2: know in the current market is quite unlikely, but even
13:41
Speaker 2: if you were struggling to rent it as a warehouse,
13:43
Speaker 2: well you can probably make a lot of money from
13:44
Speaker 2: converting it to residential. So that subsector has done very well,
13:48
Speaker 2: and again Secret has got quite a big portfolio there.
13:51
Speaker 2: And now the future story for Seagro is the data
13:54
Speaker 2: center part, which is something that they've just sort of
13:56
Speaker 2: relatively tended to be started to talk about over the
13:58
Speaker 2: last few years, may be a bit more vocally over
14:01
Speaker 2: the last year or two, where they have a lot
14:03
Speaker 2: of what's what's called powered land, so they have these
14:07
Speaker 2: sites that have access to power, which is the critical
14:10
Speaker 2: thing when it comes to data centers. And as mentioned,
14:13
Speaker 2: they have a lot of these, a lot of land
14:15
Speaker 2: in West London in Slough which is actually key corridor
14:18
Speaker 2: for a lot of this stuff. So there's loads of
14:20
Speaker 2: potential to build data centers on land that they own,
14:24
Speaker 2: some of which you know previously would have been warehouses.
14:26
Speaker 2: So if you're a warehouse landlord and all of them
14:28
Speaker 2: have been doing this, you've been going through your portfolio
14:29
Speaker 2: the last couple years. Going Hm, this was a warehouse
14:31
Speaker 2: that I was renting out for tanquedd at square foot
14:33
Speaker 2: to some you know company that makes widgets. Actually it's
14:37
Speaker 2: got power. I could convert it to a data center
14:39
Speaker 2: and maybe a hyperscale will take it and pay me
14:42
Speaker 2: a hell of lot more to pounds of square foot.
14:44
Speaker 1: So this is basically stuff that's just readly egal as
14:46
Speaker 1: data centers rather than they haven't actually they don't all
14:50
Speaker 1: in any data cent.
14:51
Speaker 2: Yeah, well so they have a small, very small amount
14:53
Speaker 2: of kind of operational data centers. But it's basically it's
14:57
Speaker 2: it's it's a development story. It's a powered land story.
14:59
Speaker 2: And what Segro and some of their peers have been
15:02
Speaker 2: doing today is that they're not data center specialists. They
15:05
Speaker 2: haven't got a long track record of building this stuff.
15:07
Speaker 2: So they've either been partnering with data center specialists or
15:10
Speaker 2: sort of just developing stuff to to sort of shell
15:15
Speaker 2: and court, so to speak, and then a specialist comes
15:17
Speaker 2: in and does does you know some of the more
15:18
Speaker 2: technical stuff. Now, as time goes on, they might acquire
15:21
Speaker 2: that expertise, they might look to take on some of
15:23
Speaker 2: this data center development directly. Themselves that we'll see how
15:26
Speaker 2: that story evolves. But that is one of the things
15:29
Speaker 2: that's kind of central to this debate about whether or
15:32
Speaker 2: not pro logist is interested in Segro is you know,
15:35
Speaker 2: at fair value.
15:44
Speaker 1: Sole logists come along. It's an all shared deal and
15:48
Speaker 1: saw but basically if you're a secret shared order, you'll
15:51
Speaker 1: get a bit of the convened entity. And what is
15:55
Speaker 1: it that the current place is roughly eat pooon something other,
16:00
Speaker 1: isn't it? Yeah, well did it above name pounds? But
16:03
Speaker 1: because the ship places have changed.
16:04
Speaker 2: Exactly, yeah, so when they initially so it's well, interestingly,
16:09
Speaker 2: religis approached. Segos board made proposal, Seagros board unanimously rejected
16:14
Speaker 2: it just then basically immediately went public and said we're
16:18
Speaker 2: going to tell the market we've made this proposal to
16:20
Speaker 2: so they didn't go back and make another offer, which
16:21
Speaker 2: you know, I think is interesting in itself. That proposal
16:24
Speaker 2: at the time valued Sigarette about nine twenty five pence
16:27
Speaker 2: a share, which when you know, is basically exactly in
16:30
Speaker 2: line with Seagro's nasset value, their AAV their last reported one.
16:34
Speaker 2: So essentially, you know, we will pay you Secro shareholders
16:38
Speaker 2: what the company says the assets are worth and given
16:40
Speaker 2: that the company at the time was trading at about
16:42
Speaker 2: twenty percent discount to its NAV. Okay, that's a twenty
16:45
Speaker 2: percent premium to the to the undisturbed share price now
16:48
Speaker 2: secret obviously a midily turned around and go, well, hang
16:50
Speaker 2: on a second, our share price has been walloped by Iran.
16:54
Speaker 2: And actually, if you compare it to you know, the
16:56
Speaker 2: share price pre Iran, it's not a very hefty premium.
16:59
Speaker 2: And also the NAV it's quite a conservative, backward looking
17:04
Speaker 2: sort of measure. Yes, that doesn't ascribe a huge amount
17:08
Speaker 2: of value to the sort of potential future earnings in
17:11
Speaker 2: our development pipeline.
17:12
Speaker 1: You're not placing then the data cent at least not
17:17
Speaker 1: exactly exactly.
17:18
Speaker 2: So Segro, as part of its defense today, has come
17:21
Speaker 2: out with a document or with valuations done for it
17:25
Speaker 2: by CBRE, trying to kind of show the value that
17:28
Speaker 2: they think is there the future earnings that there will
17:31
Speaker 2: be from their from their data center pipeline. And you know,
17:36
Speaker 2: wouldn't you know it? It's a lot.
17:37
Speaker 1: It's a NOV plus optimism take off.
17:40
Speaker 2: Yes, yeah, And to be fair to Seegro, this, you know,
17:42
Speaker 2: this is not just purely hope value. There are different
17:44
Speaker 2: ways of assessing real estate, and actually this deal kind
17:47
Speaker 2: of perfectly highlights it because the UK, you know, arguably
17:50
Speaker 2: and maybe a little bit anachronistic, we still tend to
17:53
Speaker 2: think about NAV as a sort of key metric for
17:59
Speaker 2: understanding real estate value and how we talk about roots
18:02
Speaker 2: and revaluations. Although a lot of analysts would you tear
18:05
Speaker 2: their hair out and say, please don't we do when
18:07
Speaker 2: we when we have these deals, we talk about you know,
18:09
Speaker 2: is it a discount? Now? Is it?
18:10
Speaker 1: Would analysts fear?
18:12
Speaker 2: So we focus more on earnings, which is how the
18:18
Speaker 2: US do actually value their companies. So because I immediately
18:23
Speaker 2: did this when you know, when the deal was well,
18:24
Speaker 2: when the proposals announced that, right, so you know this
18:26
Speaker 2: is roughly in line with NAB. How are the peers
18:29
Speaker 2: in the US trading Well, you can't, you know, they
18:31
Speaker 2: don't publish their NAB in the same way. But what
18:33
Speaker 2: you can say they focus on earnings. They focus on
18:36
Speaker 2: you know, f FO and metrics like that, funds from operations.
18:39
Speaker 2: What you can see is particularly the data center landlords
18:43
Speaker 2: in the US, digital realty next, people like that are
18:46
Speaker 2: trading on really really elevated multiples to earnings, which you know,
18:51
Speaker 2: it's not an apples to apples thing, but I think
18:53
Speaker 2: it's fair to say they would essentially be trading at
18:56
Speaker 2: a big premium to NAB, which is kind of the
18:59
Speaker 2: market awarding a lot of hope value there. And you
19:03
Speaker 2: do see that in the UK sometimes, you know, when
19:06
Speaker 2: when the stock market decides right, you know we're at
19:09
Speaker 2: the start of cycle, we can see that values are
19:12
Speaker 2: at the bottom and they're about to go up. You know,
19:14
Speaker 2: hopefully rents are about to go because no one's built anything.
19:17
Speaker 2: The sector will sometimes then traded a slight premium, and
19:20
Speaker 2: then Segre itself was trading at a bit of a
19:22
Speaker 2: premium for a few years before, which was you know,
19:27
Speaker 2: to do with the fact that warehouse there was a
19:29
Speaker 2: scarcity of warehouse space. Rents were going up very very fast,
19:32
Speaker 2: so the market was willing to price in a bit
19:34
Speaker 2: of that future growth.
19:35
Speaker 1: Then it does feel a little bit like that classic
19:37
Speaker 1: UK US valuation go up more broadly, and you know,
19:43
Speaker 1: all the takestocks went less than the US because people
19:45
Speaker 1: actually put appraisal on them. The feel is more reflective
19:48
Speaker 1: of the potential, etc. I mean, that's interesting. We don't
19:54
Speaker 1: know what will happen with there still one or the
19:56
Speaker 1: other that's clearly in progress. But again going back to
19:59
Speaker 1: fake this is the biggest street in the in the
20:02
Speaker 1: UK by quite a long week. It's like a fete
20:03
Speaker 1: of the sector or something like that accounts for by
20:06
Speaker 1: market value. How much more consolidation can thus be left
20:11
Speaker 1: in the sector if you're later at this point a.
20:14
Speaker 2: Really interesting question. There was a bit of a sense
20:16
Speaker 2: that it had maybe been slowing down slightly from a
20:19
Speaker 2: somewhat frenetic pace. But that said, I mean a be
20:23
Speaker 2: interesting to see what impact this deal were it to happen,
20:26
Speaker 2: you know then has and actually also in terms of
20:30
Speaker 2: you know, potentially some some new companies coming to market. Yeah.
20:33
Speaker 2: Bloomberg reported the other day that Blackstone has done some
20:36
Speaker 2: very initial investor meetings on a company called Indurant, which
20:40
Speaker 2: is one of its portfolio companies, which owns a lot
20:43
Speaker 2: of UK warehouses, which rest I see, you're able to
20:46
Speaker 2: disappear as a publicly traded the UK name.
20:48
Speaker 1: Maybe there'll be a new one.
20:51
Speaker 2: Yeah, Well, this is not something to be clear that
20:54
Speaker 2: we're reporting is going to happen anytime particularly soon, but
20:56
Speaker 2: you know, very.
20:57
Speaker 1: Very early there is the glimmerings of a potential.
21:00
Speaker 2: Yes, but if we go back to what we were
21:02
Speaker 2: talking about earlier, and you know cost and you know
21:08
Speaker 2: that being a driver of consolidation, there's there's clearly there's
21:10
Speaker 2: a lot more to be done. Right, We've got multiple
21:13
Speaker 2: For example, let's take London offices where you've got two
21:16
Speaker 2: London office routes that you know are both arguably still
21:21
Speaker 2: somewhat subscales. That'd be great Portland and derwant London. You know,
21:25
Speaker 2: for many, many years has been speculation about well, could
21:27
Speaker 2: they do something? Would they do something? Now obviously neither
21:29
Speaker 2: management team is going to be terribly incentivized to do
21:31
Speaker 2: that and you know, do themselves out of a job.
21:33
Speaker 2: But there's there's that as an opportunity. You've got some landlords,
21:38
Speaker 2: you know, trying to pivot into different sectors and again
21:41
Speaker 2: that potentially an opportunity there to sort of take out
21:44
Speaker 2: subscale businesses into those in those new sectors that they
21:46
Speaker 2: want to get into. And you know, again today what
21:50
Speaker 2: do you know, Trump talking about the Iran c is
21:54
Speaker 2: far being over straight away all the real estate stocks
21:56
Speaker 2: have sold off again, there'll be some more opportunity to
22:00
Speaker 2: stic for evate equity capital wizing in the wings, if
22:02
Speaker 2: that is to persist in those discounts blow out again. Yeah,
22:05
Speaker 2: there's several UK rates that are still triding it really
22:08
Speaker 2: quite massive discounts to their to their reported asset value.
22:11
Speaker 1: I mean, I do think this is and I guess
22:13
Speaker 1: this must be frustrating for people in the sector. But
22:16
Speaker 1: at the same time, if you are an investor, kind
22:19
Speaker 1: of private investor, and obviously nothing on this podcast is
22:22
Speaker 1: a recommendation or anything like that, if you're of the
22:25
Speaker 1: view that interest rates in the UK are probably are
22:29
Speaker 1: possibly going to come down, or that the market is
22:33
Speaker 1: overly pessimistic about the direction of rates rather thinks are
22:37
Speaker 1: going to keep going up, then rates are fairly interest
22:41
Speaker 1: rates sensitive sector and a fairly obvious way you play
22:44
Speaker 1: those hunches one way or the other. But beyond that,
22:47
Speaker 1: there is also there is quite as you say, most
22:50
Speaker 1: of these are trading that fairly solid discounts to their
22:53
Speaker 1: net asset value. It's true the sectory, and I from
22:56
Speaker 1: a value point of view.
22:58
Speaker 2: Yes, there's a whole load of different ways you can
23:01
Speaker 2: slice it and die it. But basically the UK sector
23:04
Speaker 2: right now is on a massive, massive sale. And if
23:07
Speaker 2: you're willing to take a view that probably we are.
23:10
Speaker 2: You know, the direction of rates is more likely to
23:13
Speaker 2: be steady or down than it is up. Then, you know,
23:16
Speaker 2: then that would be a by signal. There's also you know,
23:18
Speaker 2: it's not just interest rates. The actual value that management
23:22
Speaker 2: teams bring here is supposed to be on the operational side.
23:26
Speaker 2: So in terms of increasing rents, increasing earnings, well, that
23:29
Speaker 2: side of the ledger actually looks pretty positive for the
23:33
Speaker 2: reason being that, you know, going back even further, we've
23:36
Speaker 2: had Brexit, then we had the pandemic, then we've had
23:39
Speaker 2: you know, runaway inflation, so a whole series of bad shocks,
23:43
Speaker 2: which kind of means across most sectors, no one's really
23:46
Speaker 2: built very much for ten years plus now in the UK,
23:49
Speaker 2: whether that's offices, you know, retail, no one's built anything
23:51
Speaker 2: because we had far too much of retail. Warehouse development
23:54
Speaker 2: has still gone on, but even a lot of that
23:56
Speaker 2: was kind of upended by the end of the cheap money.
24:00
Speaker 2: So there isn't there's certainly not oversupply in many if
24:04
Speaker 2: any sectors, and in quite a few of the sectors
24:06
Speaker 2: there's really quite chronic undersupply, and assuming that the economy
24:11
Speaker 2: you know, Okay, the economy has not been going great guns,
24:13
Speaker 2: but assuming it sort of continues to just about take along,
24:16
Speaker 2: that should mean that rental growth is pretty robust, and
24:20
Speaker 2: therefore that should be a good growth opportunity.
24:22
Speaker 1: Yes, in the credit and the micro side. Because the
24:24
Speaker 1: other I think that is something we haven't really talked about,
24:26
Speaker 1: but because the other big issue for vestas is if
24:29
Speaker 1: you're a freie, this can be a receation. That means
24:31
Speaker 1: lots of empty premises, means lots of can you the
24:35
Speaker 1: landlord's carrying a lot it can avoid basically, And that's
24:38
Speaker 1: actually something that we haven't really seen because walking from
24:42
Speaker 1: home didn't end up being permanent. And you know, we
24:46
Speaker 1: didn't have a massive recession at any point over the
24:48
Speaker 1: last five years, despite all the kind of expectation that
24:51
Speaker 1: we would, so the actually, as you see, the actual
24:53
Speaker 1: operational side of the industry has been pretty robust.
24:57
Speaker 2: Yeah. I mean, the other thing to say on that
24:58
Speaker 2: point is if you go to the you know, the
25:00
Speaker 2: last really painful recession, I mean, putting the pandemic to
25:04
Speaker 2: one side that we had here in the financial crisis. Yes,
25:08
Speaker 2: obviously there were huge credit issues within within landlord's portfolios
25:12
Speaker 2: in terms of their tenants. But even then vacancy didn't
25:15
Speaker 2: actually get that much. I mean, yes it got worse,
25:19
Speaker 2: but it wasn't existential. What the real problem was the
25:21
Speaker 2: fact they were all massively over leveraged, and that was
25:24
Speaker 2: the big issue. That they have learned their lesson. The
25:26
Speaker 2: UK reads have learned their lesson, and as a sector
25:29
Speaker 2: they are not generally speaking, significantly over leveraged now. They
25:33
Speaker 2: are generally carrying pretty conservative levels of leverage, which you know,
25:37
Speaker 2: even if there were to be some other significant shock
25:40
Speaker 2: that came along now which suddenly you know, pushed real
25:42
Speaker 2: estate values down significantly. Again, they've still got a lot
25:46
Speaker 2: of headrooms, so that kind of major threat to the
25:49
Speaker 2: sector they've largely dealt with.
25:51
Speaker 1: Yeah, it's pretty resilient. Well, Jake, that was really really useful.
25:56
Speaker 1: Really appreciate your team, and thanks very much for coming.
25:58
Speaker 1: Then again, I'm sure we'll get you back in when
26:00
Speaker 1: we find out what actually happens with this secret deal.
26:04
Speaker 2: Yeah, yes, well I'm sure it'll keep me busy for sometimes.
26:08
Speaker 2: But thank you so much for having me.
26:13
Speaker 1: Thanks for listening to this week's Merton Talks Your Money.
26:15
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26:30
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26:35
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