Latest / Merryn Talks Money / REITs Explained: How Real Estate Investment Trusts Work and What Moves Their Prices

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REITs Explained: How Real Estate Investment Trusts Work and What Moves Their Prices · Merryn Talks Money

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  Speaker 1: Merrin Talks Your Money, the Personal Finance edition. Meren Talks Money.
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  Speaker 1: In these bonus podcasts, we talk about the best strategies
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  Speaker 1: we're making the most of your money. I'm Meren sums
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  Speaker 1: at Web and with Me Senior, a border and money
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  Speaker 1: Disuilled author John Stebak Award winning Hi.
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  Speaker 2: John, Hi Melton.
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  Speaker 1: So John, we are carrying on with answering a couple
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  Speaker 1: of questions that we have had in from readers, and
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  Speaker 1: this one is about reads. It's from someone who says
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  Speaker 1: they are a long term fan of the podcast. We
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  Speaker 1: like that, Thank you very much. Is there any chance
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  Speaker 1: we could have a program on reats at some point?
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  Speaker 1: Unless I've missed it, I don't believe there has been
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  Speaker 1: one on the relative merits or disadvantages of reaching quite
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  Speaker 1: some time, John, Have we actually ever talked about reats?
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  Speaker 1: I don't know if we have. We talked about investment
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  Speaker 1: trusts a lot, but I don't think we've ever gone
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  Speaker 1: deep into this little subsector of the market.
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  Speaker 2: I don't think we can subse market.
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  Speaker 1: Yeah, and as that suggests that nither of us have
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  Speaker 1: any deep expertise, we've invited on a guest. So today
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  Speaker 1: we are going to do a program on reats. James
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  Speaker 1: is the name of the reader. Thanks you very much,
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  Speaker 1: And we have invited into the studio to do with
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  Speaker 1: us a Bloomberg expert on this. This is Jack Sitters.
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  Speaker 1: Jack leads our coverage on all sorts of topics to
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  Speaker 1: do with investing, but in particular real estate. Jack, welcome
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  Speaker 1: to the London studio.
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  Speaker 3: Thank you. I'll do my best to live up to
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  Speaker 3: that billing. I don't know. We shall see.
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  Speaker 1: Look when we say someone's an expert, they're an expert,
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  Speaker 1: and that's just that.
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  Speaker 3: Okay, yeah, yeah, we'll let the listeners be the judge
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  Speaker 3: of that come the end of the podcast.
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  Speaker 1: I guess now that's not how it works.
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  Speaker 2: This is like fund manager stuff. Performance is relative, so
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  Speaker 2: you're there exactly.
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  Speaker 1: Being the expert is not the thing. It's just being
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  Speaker 1: more more expert than me and John. Okay, So here
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  Speaker 1: we go. What actually is a real estate investment trust?
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  Speaker 3: Okay? So the ret regime as it were, came into
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  Speaker 3: effect in the UK and they have them have their
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  Speaker 3: own versions in most countries in Europe now just around
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  Speaker 3: the time of the global financial crisis, and the idea
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  Speaker 3: was it was a sort of tax efficient way for
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  Speaker 3: you and me, mom and pop investors in the Bloomberg
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  Speaker 3: pilance to invest in real estate, so you're not getting
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  Speaker 3: that double taxation. And the deal was that these companies
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  Speaker 3: would return the vast majority of their earnings in the
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  Speaker 3: form of dividends, so they would have to have most
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  Speaker 3: of their portfolio would be in what they would call
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  Speaker 3: the investment portfolios, relatively boring long term buildings with long
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  Speaker 3: leases that would generate steady rents. And then they would
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  Speaker 3: have a development portfolio, or some of them would have
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  Speaker 3: a development portfolio where they would do slightly riskier stuff,
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  Speaker 3: build out buildings, try and make some development profits. So
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  Speaker 3: they've been around in the UK for what are we
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  Speaker 3: talking now, getting on, I guess years, but.
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  Speaker 1: Okay, so just go back a little bit, just be
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  Speaker 1: absolutely clear. This is a listed investment vehicle which invests
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  Speaker 1: in property in the main inner property rental business and
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  Speaker 1: also in development business. Yeah, exactly, both parts to this.
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  Speaker 1: And then the tax efficient bit is that as long
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  Speaker 1: as they pay out ninety percent of the of the
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  Speaker 1: income they received from their property every year, they don't
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  Speaker 1: have to pay corporation tax. So that's the tax efficient bit, right.
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  Speaker 1: So for an ordinary investor, it's simply a way of
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  Speaker 1: getting exposure to any particular type of real estate without
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  Speaker 1: worrying about tax or liquidity.
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  Speaker 3: Yeah, and most of them were already publicly traded landlords
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  Speaker 3: before the regime came in, and then they did all
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  Speaker 3: the things that ticked all the boxes that they needed
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  Speaker 3: to take in order to convert to become a route
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  Speaker 3: to get reat status. And as you said, the whole
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  Speaker 3: idea is, you know, if you're a retail investor and
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  Speaker 3: you want exposure to commercial real estate, but you don't
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  Speaker 3: have one hundred million quid to go and buy an
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  Speaker 3: office building, then you can go and buy a share
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  Speaker 3: in one of these routs and that will give you
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  Speaker 3: commercial real estate like exposure. Albeit that then this is
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  Speaker 3: probably a whole other issue we'll get onto that you're
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  Speaker 3: then exposing yourself to stock market volatility, which is very
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  Speaker 3: different from commercial real estate volatility. So yeah, that's an
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  Speaker 3: entirely separate issue. But so it's you're getting exposure to
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  Speaker 3: commercial real estate market, but yeah, it's maybe not quite
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  Speaker 3: the same as some of the ways that you can
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  Speaker 3: invest in commercial real estate through private funds.
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  Speaker 1: And when we say that they're invest in commercial real estate,
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  Speaker 1: they're actually a variety of different kind of routs, right,
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  Speaker 1: So you've got some in residential properties, some in commercial property,
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  Speaker 1: some in healthcare related property, etc. There's a variety of
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  Speaker 1: different subsectors.
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  Speaker 3: Yes, exactly, And again to further complicate the picture, it
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  Speaker 3: always used to be the case that most of the
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  Speaker 3: routes like to specialize. They were a London office landlord,
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  Speaker 3: or they were a UK retail landlord, and the idea
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  Speaker 3: being that me, as the investor, I want to make
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  Speaker 3: the decision about what type of real estate I'm allocating
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  Speaker 3: capital to, and then okay, I've decided I think London
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  Speaker 3: offices are the thing. I'm going to go and invest
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  Speaker 3: in what should be the best London office team who
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  Speaker 3: run this London specialist London office rout Now that's fine
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  Speaker 3: unless you happen to be saved. For example, a retail
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  Speaker 3: landlord in the middle of the retail apocalypse that unfolded
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  Speaker 3: between very loosely twenty ten and the end of COVID
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  Speaker 3: when you know, the rise of online shopping basically meant
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  Speaker 3: that all the retail landlords had a just a torrid
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  Speaker 3: time values collapse. Understandably quite a few of those management
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  Speaker 3: teams when yeah, maybe we might need to pivot and diversify,
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  Speaker 3: and the big winners that you've seen over that. In fact,
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  Speaker 3: probably the period that reats have been in existence in
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  Speaker 3: commercial real estate have been the kind of private equity
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  Speaker 3: real estate investors, and they are much more agnostic in
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  Speaker 3: terms of the types of real estate they will invest in.
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  Speaker 3: Talking like a Blackstone here for example, they will invest
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  Speaker 3: in any type of commercial real estate depending on where
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  Speaker 3: they see there being structural advantages, so they can pivot
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  Speaker 3: and they can allocate. They will raise capital from investors
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  Speaker 3: with a mandate to put it where they think is best.
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  Speaker 3: So you've started to see this evolution in the re
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  Speaker 3: market a bit, with some management teams going, oh, maybe
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  Speaker 3: we should do different things. Maybe originally we were an
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  Speaker 3: office rut or retail rout but actually we think warehousards
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  Speaker 3: are things, so we should pivot into that. But that's
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  Speaker 3: an interesting sort of debate then between the managers and
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  Speaker 3: the shareholders and what does the capital actually want. Do
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  Speaker 3: they want to make that capital allocation decisions the nelves
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  Speaker 3: or are they trusting the management team to make it
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  Speaker 3: for them?
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  Speaker 1: Yeah, okay, And other areas that they could be in
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  Speaker 1: of the data centers, there's quite a few self storage ones,
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  Speaker 1: or there were anyway, So there's a whole group of
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  Speaker 1: different sectors that.
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  Speaker 3: Ye, yes, yeah, exactly.
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  Speaker 2: Yeah.
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  Speaker 3: And in commercial withs if we were having this conversation
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  Speaker 3: twenty years ago, it would be like offices, retail would
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  Speaker 3: be the kind of twin aristocracies, and then maybe a
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  Speaker 3: little bit of warehouses. Now retail obviously had its horror show.
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  Speaker 3: Then offices probably one of the more unloved sectors now
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  Speaker 3: because of COVID and what increased work from home etsetera.
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  Speaker 3: And you've got, as you said, this huge diversity of
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  Speaker 3: sub sectors. Data centers would be the really hot sexy one.
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  Speaker 3: Student housing was a very niche strategy now as a
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  Speaker 3: very established part of the market, self storage, healthcare increasingly,
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  Speaker 3: so yeah, a much much greater variety.
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  Speaker 1: All right, Let's talk then about what makes these trust
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  Speaker 1: perform or not perform. Because some of them have had
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  Speaker 1: a pretty awful couple of years, and because they are
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  Speaker 1: listed vehicles, the share price can trade at a significant
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  Speaker 1: discount for the net asset value. And it definitely has
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  Speaker 1: been as you say, retail has had a bad time.
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  Speaker 1: Student housing has had a horrible time for obvious reasons,
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  Speaker 1: and across the board discounts have been quite high.
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  Speaker 3: What's been If we just focus on the UK here
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  Speaker 3: and I just checked the numbers, the UK route sector
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  Speaker 3: is currently trading at a discount of just under twenty
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  Speaker 3: percent across the board. This is according to EPRAH, the
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  Speaker 3: European Public Real Estate Association, and that is a little
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  Speaker 3: bit worse than the historical average, although actually that's a
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  Speaker 3: bit better than it has been doing the last few
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  Speaker 3: years if the last. The UK has obviously just been
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  Speaker 3: through one shock after another over the last ten years,
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  Speaker 3: none of which has particularly helped sentiment towards publicly traded
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  Speaker 3: real estate. And as as we've touched on, different sectors
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  Speaker 3: have had their challenges at different time. So, yeah, retail
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  Speaker 3: terrible few years, then office then when interest rates blew out,
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  Speaker 3: almost everything was trading at a discount. Was I think
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  Speaker 3: there was one point where probably Unite, which the student
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  Speaker 3: housing landlord, was maybe the only UK route that was
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  Speaker 3: trading at a premium. That's now gone because of the
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  Speaker 3: warrior about student housing.
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  Speaker 1: I think I wrote a very timely article on that.
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  Speaker 1: I'd like to remind everybody that when Unite were riding high,
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  Speaker 1: I did write an article going, oh I wouldn't do
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  Speaker 1: that A five year plows on one very rare occasion, right.
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  Speaker 3: Is that? Yeah, it's it's well, like with a lot
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  Speaker 3: of real estate, it's vulnerable to forces beyond its control.
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  Speaker 3: And right now, if you look at the discouns of
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  Speaker 3: different sectors of trading at there's a big variation. So
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  Speaker 3: office is very unloved, residu is actually also residential is
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  Speaker 3: also quite unloved at the moment. But the warehouse landlords
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  Speaker 3: do much better, much narrower discounts, and even at the
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  Speaker 3: risk of introducing even more jargon, you've got one that
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  Speaker 3: called London Metric who's focuses on what we call triple
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  Speaker 3: triple netleases, where they've been doing quite well. They're a
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  Speaker 3: bit of a market darling, Well.
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  Speaker 1: Hang on, work, what is a triple net lease? You
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  Speaker 1: can't just introduce that, Okay.
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  Speaker 3: Basically, it's essentially that the tenant is responsible for a
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  Speaker 3: lot of the costs around things like dilapidation and so forth,
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  Speaker 3: so that there's there's no what the landlords would call leakage.
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  Speaker 3: They're very long term, they're very secure, and yeah, the
• 9:52
  Speaker 3: rent typically only goes one way. But they're an interesting one,
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  Speaker 3: an interesting company because they are going back to our
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  Speaker 3: earlier conversation around that whole sort of sectoral allocation. They
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  Speaker 3: hit way back in the day before they were called
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  Speaker 3: London Metric. We and the people that ran it were
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  Speaker 3: basically retail specialists. But their chief of Zach Andrew Jones,
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  Speaker 3: saw the writing on the wolf what was coming for retail,
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  Speaker 3: made the big strategic decision to pivot towards industrial property
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  Speaker 3: warehouses given the rise of e commerce, and that proved
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  Speaker 3: to be quite a prescient thing to do. And then
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  Speaker 3: they have they've also so this speaks to a kind
• 10:23
  Speaker 3: of much broader issue. To go back to your question
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  Speaker 3: about why these companies treading at discounts, they one of
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  Speaker 3: the reasons is lots of them are very small, and
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  Speaker 3: therefore proportionally they're very expensive to run because you whether
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  Speaker 3: you've got a billion or ten billion or a hundred billion,
• 10:39
  Speaker 3: you basically need a fairly similar size management team. And
• 10:42
  Speaker 3: actually that management team is not that big. I often
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  Speaker 3: think that of all the jobs you could do running
• 10:46
  Speaker 3: a footy one hundred company, running footy one hundred landlord
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  Speaker 3: on was one of the easiest in terms of like
• 10:49
  Speaker 3: headcount that you've got to you've got to manage. But anyway,
• 10:52
  Speaker 3: they but they recognize that you need scale to get
• 10:56
  Speaker 3: with better cost ratios, and that is something that investors
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  Speaker 3: now really want. Also, so you can leverage relationships with
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  Speaker 3: tenants and all that sort of thing, and so they
• 11:03
  Speaker 3: have gone out and acquired a huge number of subscale
• 11:07
  Speaker 3: peers and grow themselves. And what that's done is that's
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  Speaker 3: pushed them into bigger indices THEYAN now in the Footy
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  Speaker 3: one hundred, that introduces new shareholders. But even then you
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  Speaker 3: compare them to the US and they London Metric will
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  Speaker 3: be one of our bigger rates. They're tiny compared to
• 11:22
  Speaker 3: their US peers. Now this stat is slightly stale, but
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  Speaker 3: I believe it's still true. Prolodgis huge industrial landlord, warehouse
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  Speaker 3: landlord in the US has its market cap is bigger
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  Speaker 3: than the entire UK ret sector combined. So when you
• 11:37
  Speaker 3: are a UK reate and you are going out on
• 11:39
  Speaker 3: investor road shows and you're going to the US and
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  Speaker 3: you're trying to get meetings and trying to get the
• 11:43
  Speaker 3: ear of fund managers, and you've got a couple of
• 11:47
  Speaker 3: billion in assets, they're looking at you going, hey, you're
• 11:49
  Speaker 3: really expensive to run b how much liquidity is there
• 11:52
  Speaker 3: in your stock and they're just not interested. So in
• 11:56
  Speaker 3: order for the UK to get over a bit of
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  Speaker 3: this structural discount in what they're trading relative to the
• 12:01
  Speaker 3: value of their assets. One of the things that they
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  Speaker 3: really need is scale, and as I say, London Metric
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  Speaker 3: is one of these companies that definitely seems to have
• 12:07
  Speaker 3: got that message and they've been on an absolute mission
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  Speaker 3: to acquire and to get bigger. So yeah, so that's
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  Speaker 3: part of the answer as to why they've been trading
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  Speaker 3: at discounts.
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  Speaker 1: Okay, So it's partly scale and lack of international attention
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  Speaker 1: as a result of that, it's partly interest rates, right,
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  Speaker 1: because they pretty much.
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  Speaker 3: Exactly the very very interest rates sensitive and because basically
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  Speaker 3: commercial real estate investors will always demand a premium over
• 12:32
  Speaker 3: risk free rate. So if government bonds are trading at
• 12:34
  Speaker 3: three to four, then I want my commercial real estate
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  Speaker 3: to yield six or seven. Say, this is very crude numbers,
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  Speaker 3: plucking the marathon, a healthy premium for the risk I'm taking.
• 12:43
  Speaker 3: So when interest rate rise, the required yield on real
• 12:47
  Speaker 3: estate rises. When the yield rises, the value falls, and
• 12:49
  Speaker 3: equity market investors will straightforwardly as interest rates start to rise,
• 12:53
  Speaker 3: sell off real estate stocks because they anticipate them having
• 12:56
  Speaker 3: to write down the value of their portfolios.
• 12:59
  Speaker 1: Yeah, okay, interest for it is likely to fall from here.
• 13:02
  Speaker 3: That's should be a tailwind. So we should be entering
• 13:05
  Speaker 3: a bit of a sweet spot for UK routs right
• 13:08
  Speaker 3: now because basically, again talking in very crude terms here,
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  Speaker 3: no one's really built very much for the last several years.
• 13:15
  Speaker 3: Is particularly if you look at the London office market.
• 13:17
  Speaker 3: For example, we had Brexit, which was big doubts about
• 13:20
  Speaker 3: are the banks all going to leave? Then we had
• 13:22
  Speaker 3: COVID okay, is anyone going to need an office anymore?
• 13:25
  Speaker 3: And then we had interest rates going up and construction
• 13:28
  Speaker 3: cost inflation going through the roof. So my development that
• 13:31
  Speaker 3: I was planning to build that I thought I would
• 13:33
  Speaker 3: cost me X to build is now going to cost
• 13:34
  Speaker 3: me X times two or three. So yeah, the long
• 13:37
  Speaker 3: short of it is no one's built anything. What does
• 13:39
  Speaker 3: that mean? There's hardly any new supply And the tenants
• 13:42
  Speaker 3: who are looking for offices at the moment, what do
• 13:44
  Speaker 3: they want? They want the best new stuff that is
• 13:46
  Speaker 3: going to lure staff back into the office. Say look,
• 13:49
  Speaker 3: we're going to make you come into the office four
• 13:51
  Speaker 3: days a week, but we're going to make sure it's
• 13:52
  Speaker 3: a really nice office. And also we want to cut
• 13:54
  Speaker 3: our carbon footprint as a business. What's an easy way
• 13:56
  Speaker 3: to do that? If I'm a sort of knowledge based business.
• 13:58
  Speaker 3: I'll get myself a nice zero carbon office building and
• 14:01
  Speaker 3: there you go. I've ticked my box of slashing my
• 14:04
  Speaker 3: my carb and footprint. So all of which means London
• 14:07
  Speaker 3: office rents should and they are going up pretty rapidly
• 14:11
  Speaker 3: and they potentially will go up a lot more over
• 14:13
  Speaker 3: the next couple of years. So you've got that as
• 14:15
  Speaker 3: one potential tailwind, and this is true across a number
• 14:18
  Speaker 3: of sectors, to be clear, not just offices. And then
• 14:21
  Speaker 3: you've also, as you said, you've got the potential for
• 14:23
  Speaker 3: the tailwind of interest rates coming down, which should be
• 14:26
  Speaker 3: good for property yields and there for valuations. So quite
• 14:29
  Speaker 3: a rare dynamic of kind of both the numertor and
• 14:32
  Speaker 3: the denominator going in landlord's favor. And yet we still
• 14:36
  Speaker 3: haven't really seen generalist investors waking up to that and
• 14:40
  Speaker 3: piling into rates in the way that you might expect.
• 14:43
  Speaker 3: And to talk to specialist real estate ret investors and
• 14:48
  Speaker 3: management teams and analysts over the last few years, there's
• 14:51
  Speaker 3: just this deep resignation about when is the market going
• 14:54
  Speaker 3: to wake up to us, When are we going to rerate?
• 14:56
  Speaker 3: What is the catalyst which is going to cause those
• 14:58
  Speaker 3: discounts to narrow.
• 15:17
  Speaker 1: Would you expect a lot more a lot of corporate
• 15:19
  Speaker 1: action in the sector, as you have in a lot
• 15:21
  Speaker 1: of the wider part of the investment trust.
• 15:23
  Speaker 3: Yes, we have already seen quite a lot. There has
• 15:26
  Speaker 3: been a lot of consolidation over the last couple of years.
• 15:28
  Speaker 3: I think initially that was a lot of private equity
• 15:31
  Speaker 3: firms Blackstone and the like seeing the massive discounts these
• 15:34
  Speaker 3: firms are trading at and going yeah, okay, I'll have
• 15:37
  Speaker 3: some of that. I think the market is overly discounting
• 15:39
  Speaker 3: those values. I can see rate rents are going to rise,
• 15:42
  Speaker 3: and they wouldn't necessarily say this, but also I reckon
• 15:44
  Speaker 3: interest rates are going to go lower and that will help.
• 15:46
  Speaker 3: So they've been taking them out at big premiums to
• 15:49
  Speaker 3: their share price, but in lots of cases discounts to
• 15:53
  Speaker 3: their reported asset values, with a view to them whether
• 15:56
  Speaker 3: it's splitting them up and selling off the assets individually
• 15:59
  Speaker 3: at book value and creaming the difference, or whether it
• 16:01
  Speaker 3: is scaling them into something else and who knows, potentially
• 16:04
  Speaker 3: ipoing further down the line. Although brave person to and
• 16:07
  Speaker 3: launch a big real estate IPO in the current climate
• 16:10
  Speaker 3: for all the reasons we've just been discussing then, but
• 16:13
  Speaker 3: then actually more recently, and this goes back to what
• 16:15
  Speaker 3: we were talking about with set companies like London Metric,
• 16:18
  Speaker 3: we've actually seen much many more peer to peer consolidation
• 16:22
  Speaker 3: where you might be trading at a discount to your reported
• 16:25
  Speaker 3: asset value, and I might be trading at a reported
• 16:27
  Speaker 3: at discount to my reported asset value, but actually if
• 16:30
  Speaker 3: we do an all paper deal then that doesn't really matter.
• 16:33
  Speaker 3: And so yeah, we've seen a lot of consolidation there.
• 16:35
  Speaker 3: In fact, we've had a couple of interesting takeover battles,
• 16:37
  Speaker 3: one in the healthcare real estate space where you had
• 16:39
  Speaker 3: KKR trying to buy a landlord looking like they were
• 16:42
  Speaker 3: going to and then all of a sudden one of
• 16:43
  Speaker 3: their peers came in and said, oh, actually, why don't
• 16:45
  Speaker 3: we do it? And then you as the investors, can
• 16:47
  Speaker 3: remain invested and you get to participate in all the
• 16:50
  Speaker 3: rental growth we think is coming down the line, very
• 16:52
  Speaker 3: closely run thing, and ultimately the investors went with the
• 16:55
  Speaker 3: with the sort of peer to peer deal rather than
• 16:56
  Speaker 3: the take private deal, which I think is quite interesting
• 16:58
  Speaker 3: and maybe says something about tiny grain shoots of optimism
• 17:02
  Speaker 3: for the publicly listed real estate market.
• 17:04
  Speaker 1: I mean, yeah, no, I.
• 17:05
  Speaker 2: Think it's a very interesting sector because going back to
• 17:07
  Speaker 2: the interest rates point wedgings, I think it's interesting that
• 17:10
  Speaker 2: so from the point of view of interest rates rise,
• 17:13
  Speaker 2: prices go down, so it's a bit like a bond,
• 17:15
  Speaker 2: except it's not a bond because the rents mean that
• 17:17
  Speaker 2: it's actually inflation protected. So what you really need to
• 17:21
  Speaker 2: worry about is more a recession or their specific sector
• 17:25
  Speaker 2: getting harmred. And I guess that's kind of one of
• 17:29
  Speaker 2: the big questions at the moment is Okay, interest rates
• 17:32
  Speaker 2: are coming down, inflation is probably just about under control,
• 17:36
  Speaker 2: and then it's more just about but which sectors are
• 17:39
  Speaker 2: going to survive in this particular economy.
• 17:43
  Speaker 3: Yeah, I mean absolutely, it's yeah. The big risk is
• 17:47
  Speaker 3: clearly as a recession and potential credit risk in the
• 17:50
  Speaker 3: tenant pace. Albeit that you look back to the global
• 17:54
  Speaker 3: financial crisis and actually the number of the number of
• 17:57
  Speaker 3: landards who really saw significant vacancies of tenants game bus
• 18:01
  Speaker 3: was relatively limited where I sit, And this is I
• 18:03
  Speaker 3: guess colored by having covered real estate for longer than
• 18:06
  Speaker 3: I'd care to admit, But I guess immediately since the GFC. Actually,
• 18:10
  Speaker 3: the thing that has destroyed the most value and driven
• 18:13
  Speaker 3: the most value in real estate has been these kind
• 18:16
  Speaker 3: of big structural changes in the way that we live
• 18:20
  Speaker 3: and work and shop and consume to the point around
• 18:24
  Speaker 3: the rise of online shopping. Like if you were in
• 18:26
  Speaker 3: if you were lucky enough to be a warehouse landlord
• 18:29
  Speaker 3: over the last decade, you've just been a huge beneficiery
• 18:31
  Speaker 3: without really having to do anything very clever. A trust.
• 18:34
  Speaker 3: Demand for warehouses has gone up a lot because people
• 18:36
  Speaker 3: need to store stuff a lot more because they want
• 18:37
  Speaker 3: to deliver it to your house instead of it being
• 18:39
  Speaker 3: in a shop. You know, on the flip side, you
• 18:41
  Speaker 3: could have been in fact, I think paraphrasing John Gray
• 18:44
  Speaker 3: here from Blackstone, who basically said, you could have over
• 18:47
  Speaker 3: the last decade of I forget the exact time period,
• 18:49
  Speaker 3: but you could have bought the world's worst warehouse and
• 18:52
  Speaker 3: the world's best shopping center and you still would have
• 18:54
  Speaker 3: been with the world's warehouse. So it's these big structural
• 18:57
  Speaker 3: forces have been the things that I think have really
• 19:00
  Speaker 3: move the needle for these landlords. And then we thought
• 19:03
  Speaker 3: maybe COVID would be that thing for offices and certainly
• 19:06
  Speaker 3: if you looked to the share prices of the office
• 19:07
  Speaker 3: landlords and there was just a huge amount of parishness,
• 19:10
  Speaker 3: I don't. I think actually, with the benefit of a
• 19:12
  Speaker 3: few years on, now we see more people returning to work,
• 19:15
  Speaker 3: we see more companies mandating that, and I think the
• 19:18
  Speaker 3: death of the office, to be fair, also, the death
• 19:20
  Speaker 3: of the shopping center never fully came to pass. It's
• 19:22
  Speaker 3: just that demand is now concentrated in just a far
• 19:26
  Speaker 3: smaller number of very high quality, very large shopping centers. Ultimately,
• 19:30
  Speaker 3: people still want to go and try stuff on. You
• 19:32
  Speaker 3: just don't maybe don't need five hundred of your shops
• 19:36
  Speaker 3: across the UK to cover the UK. Maybe you can
• 19:38
  Speaker 3: do it with fifty and the fifty bigger shopping centers.
• 19:40
  Speaker 3: But if you own that one of those shopping centers
• 19:42
  Speaker 3: right now, maybe in quite a good place. And actually,
• 19:44
  Speaker 3: again the retail landlords, having endured this like horrific period
• 19:48
  Speaker 3: over the last couple of years, have actually done quite
• 19:49
  Speaker 3: well relative to the wider peer group.
• 19:52
  Speaker 2: See actually just you seeing that a bit big structural changes.
• 19:56
  Speaker 2: The obvious question then, is there any angle from EI
• 20:01
  Speaker 2: that you can see being something that may either be
• 20:03
  Speaker 2: an opportunity or for reaps.
• 20:06
  Speaker 3: Yeah. Absolutely, data centers is obviously the clear play there.
• 20:12
  Speaker 3: And so one of the things that we are seeing
• 20:13
  Speaker 3: and have seen is, as I'm sure your listeners know,
• 20:17
  Speaker 3: the big bottleneck for data centers is power. And so
• 20:21
  Speaker 3: finding powered land is One warehouse landlord described it to
• 20:26
  Speaker 3: me as like finding a lottery ticket. So let's say
• 20:28
  Speaker 3: you were you were a bit an odor of warehouses
• 20:31
  Speaker 3: across the UK, and you're looking at your portfolio and
• 20:34
  Speaker 3: you suddenly reunize, actually, hang on a second, that site
• 20:36
  Speaker 3: would work as a data center, and it's got power,
• 20:39
  Speaker 3: Maybe I can convert it to a data center. Suddenly
• 20:41
  Speaker 3: the valuation is going to go to the moon, as
• 20:43
  Speaker 3: they say. And so that's a process that a lot
• 20:46
  Speaker 3: of landlords have been going through over the last couple
• 20:47
  Speaker 3: of years to try and figure out. And now you
• 20:49
  Speaker 3: are seeing a lot of the big industrial routs. So
• 20:52
  Speaker 3: companies like Seagrow, like Tritax, big Rock Suet, they now
• 20:56
  Speaker 3: have meaningful I'd be fair. Segre has had this for
• 20:58
  Speaker 3: quite a while, but they now had meaning parts of
• 21:00
  Speaker 3: their portfolio that are in data centers. Now, what I
• 21:04
  Speaker 3: wonder and could be the next leg of this is
• 21:07
  Speaker 3: those does the public market value that differently to the
• 21:12
  Speaker 3: warehouse bit, At which point I'm sure some enterprising investment
• 21:15
  Speaker 3: banker will come along and say, I think you should
• 21:17
  Speaker 3: spin out your data center business into a separate platform
• 21:19
  Speaker 3: because that'll trade at a different multiple.
• 21:22
  Speaker 2: But the consolidition.
• 21:24
  Speaker 3: Yeah, so data centers are the big play there, although
• 21:27
  Speaker 3: the risk of being a bit of a bird's honor.
• 21:28
  Speaker 3: One of the questions I have around that to our
• 21:31
  Speaker 3: previous conversation about structural shifts and is like these things
• 21:35
  Speaker 3: are just massive stores of just the capex required is
• 21:40
  Speaker 3: so huge. I've really struggled to get my head around
• 21:42
  Speaker 3: at having spent a career writing about property deals that
• 21:45
  Speaker 3: I thought were big, which were a few hundred million,
• 21:47
  Speaker 3: and these things are just like multi billion. What happens
• 21:50
  Speaker 3: when someone invents some new material that allows data to
• 21:53
  Speaker 3: be stored or processed in a different way, and the.
• 21:56
  Speaker 1: Land jack all the talk about moving the data centers
• 21:58
  Speaker 1: to space and all like you know, see, it seems
• 22:01
  Speaker 1: short term that we will have these films and the demand.
• 22:03
  Speaker 3: Like there Again, I reveal my ignorance here in terms
• 22:06
  Speaker 3: of like there's a tech side of things, but as
• 22:08
  Speaker 3: I understand it, where you want your data stored. If you're,
• 22:11
  Speaker 3: for example, training a large language model, is very different
• 22:16
  Speaker 3: to if you're doing something more consumer facing because latency,
• 22:19
  Speaker 3: like the delay is less of an issue if you're
• 22:21
  Speaker 3: doing it predominantly doing training. But then as soon as
• 22:23
  Speaker 3: you're doing something like a search on Google or any
• 22:26
  Speaker 3: other search engine, then the speed is of the essence
• 22:29
  Speaker 3: a bit if you're thinking of high frequency trading and
• 22:31
  Speaker 3: that kind of thing, but that has a huge impact
• 22:32
  Speaker 3: on where you might want to locate your data center anyway.
• 22:35
  Speaker 3: So obsolescence risk, I would say, just seems like this
• 22:38
  Speaker 3: huge potential problem for data centers. That could be one
• 22:43
  Speaker 3: of those structural shifts that suddenly creates huge winners and
• 22:46
  Speaker 3: huge losers. But I'm sure I'll be writing about that
• 22:48
  Speaker 3: for years to come.
• 22:50
  Speaker 1: Sure you well, and we'll be talking about it. So Jack,
• 22:53
  Speaker 1: if for someone looking at this sector now and going
• 22:55
  Speaker 1: low it sounds great, Jack is incredibly compelling. I'd love
• 22:58
  Speaker 1: to be in a ret Where do they start If
• 23:00
  Speaker 1: you're looking at it right now, what's the most compelling
• 23:04
  Speaker 1: part of the sector and the easiest way in do
• 23:06
  Speaker 1: you think?
• 23:07
  Speaker 3: So to our previous conversation around costs and liquidity, you
• 23:11
  Speaker 3: probably look at some of the bigger names out there,
• 23:13
  Speaker 3: and again just focusing on the UK. Here warehouses still
• 23:17
  Speaker 3: doing pretty well, pretty solid rental growth, maybe a bit
• 23:20
  Speaker 3: more mixed and a bit more patched than it was
• 23:22
  Speaker 3: around COVID where we just saw this super super strong
• 23:25
  Speaker 3: demand and super strong rental growth, But broadly I think
• 23:27
  Speaker 3: most of the analysts still see that as a pretty
• 23:30
  Speaker 3: positive area. Segro is the biggest UK route and they
• 23:35
  Speaker 3: are a European industrial landlord, but as I said, also
• 23:38
  Speaker 3: with an increasingly interesting data center business as well, and
• 23:41
  Speaker 3: try to as big box where it would be the
• 23:43
  Speaker 3: other sort of big UK name there. Actually Blackstone owns
• 23:46
  Speaker 3: a big UK focused warehouse land or that they've branded Indurant,
• 23:50
  Speaker 3: which you never know could be a publicly traded company
• 23:53
  Speaker 3: in the next few years, so that those stocks are
• 23:55
  Speaker 3: doing reasonably well. Over the last few years, the matchra
• 23:57
  Speaker 3: had been beds and sheds, so shed's being real estate
• 24:00
  Speaker 3: parlance for warehouses, beds being the variety of different kind
• 24:03
  Speaker 3: of living strategies, so whether that's rental housing, senior housing,
• 24:07
  Speaker 3: student housing, student housing. Unite would be the big player
• 24:11
  Speaker 3: in the UK. But as we started at at the
• 24:13
  Speaker 3: top of recording student housing is definitely looking a bit
• 24:16
  Speaker 3: less rosy than it has done over the last several years.
• 24:19
  Speaker 3: I've spent more of my career looking at London offices
• 24:23
  Speaker 3: than anything else, and I have to say, yeah, I
• 24:25
  Speaker 3: think the office market right now the fundamentals are as
• 24:29
  Speaker 3: good as I've ever seen them. Whether that translates to
• 24:33
  Speaker 3: the public markets reflecting out of share prices is another matter.
• 24:37
  Speaker 3: You've seen many times where the fundamentals look good, but
• 24:39
  Speaker 3: the public markets have been focused on something else and
• 24:41
  Speaker 3: it just hasn't translated. But if London offices are your thing,
• 24:44
  Speaker 3: big players there, You've got specialists like Derwant and Great
• 24:47
  Speaker 3: Porland to states who purely do London offices, or what
• 24:50
  Speaker 3: used to be the kind of what we would call
• 24:52
  Speaker 3: the diversified majors, which think in their British Land in
• 24:55
  Speaker 3: particular and land securities is bigger, but they're moving away
• 24:58
  Speaker 3: from London offices to some degree. A British Land. A
• 25:00
  Speaker 3: big part of their business is London office campus campuses
• 25:03
  Speaker 3: as they call them, so it's big collections of London
• 25:05
  Speaker 3: offices and shops or where they own the whole thing.
• 25:07
  Speaker 3: But they also have a few other strategies as well,
• 25:09
  Speaker 3: so they would be the way to play that, I suppose.
• 25:12
  Speaker 2: The other good thing boat reads is that even if
• 25:15
  Speaker 2: the value doesn't get immediately recognized, they do tend to
• 25:18
  Speaker 2: be higher than averaged evidends. Yes, so you do get
• 25:23
  Speaker 2: to what is it that horrible cliche you get paid
• 25:25
  Speaker 2: to wet. Yeah, So if you do think there's fundamentally
• 25:29
  Speaker 2: a good team and it just hasn't come about, Yeah,
• 25:31
  Speaker 2: then at least you're not going to westen your team
• 25:33
  Speaker 2: particularly be Yeah.
• 25:34
  Speaker 3: I mean the traditional thinking with reads is that they
• 25:37
  Speaker 3: should be really boring companies. They should just be solid,
• 25:41
  Speaker 3: steady dividend payers. And in the US, in some ways
• 25:44
  Speaker 3: that's what a lot of them are in the UK
• 25:46
  Speaker 3: because a lot of them were historically, Yeah, they'd already
• 25:48
  Speaker 3: were publicly traded real estate companies and then they converted
• 25:51
  Speaker 3: to become reads. Some of them had a kind of
• 25:53
  Speaker 3: in their DNA, a bit more swashbuckling, like they liked
• 25:56
  Speaker 3: doing a bit more development, and that was where some
• 25:58
  Speaker 3: of the kind of super profits came from. For that,
• 26:00
  Speaker 3: you've got to time the cycle and you've got to
• 26:02
  Speaker 3: and some of them are very good at that. But yeah,
• 26:05
  Speaker 3: in theory, they should be really boring, sleepy companies that
• 26:09
  Speaker 3: own income producing assets and hold them for a really
• 26:11
  Speaker 3: long time. And yes, they'll tell you that they do
• 26:12
  Speaker 3: lots of hard work to sweat them and manage them.
• 26:15
  Speaker 3: Basically just sitting on a big portfolio of income producing
• 26:19
  Speaker 3: assets and paying it out in the form of dividends.
• 26:21
  Speaker 2: I take it this is quite an easy job.
• 26:25
  Speaker 3: Like yeah, well yeah, nothing like nothing like a seasoned
• 26:29
  Speaker 3: hack to be deeply cynical about the companies they cover. No,
• 26:31
  Speaker 3: the real estate industry is full of lovely, charming people
• 26:34
  Speaker 3: who are good enough to give their time and wisdom
• 26:37
  Speaker 3: to ill educated young reporters who are trying to learn
• 26:39
  Speaker 3: about their market.
• 26:41
  Speaker 1: Perfect, perfect John, anything else we need to ask, do
• 26:44
  Speaker 1: you think No?
• 26:45
  Speaker 2: I think that was That was very comprehensive.
• 26:47
  Speaker 3: Very probably much more information than anybody actually needed.
• 26:51
  Speaker 1: Thank you very much for coming on today. We really
• 26:52
  Speaker 1: appreciate it.
• 26:53
  Speaker 3: That was excellent, brilliant. Thank you so much for having
• 26:55
  Speaker 3: me on.
• 26:57
  Speaker 1: Thanks for listening to this week's Marin Dogs your money.
• 26:59
  Speaker 1: If you like those show were review and subscribe where
• 27:01
  Speaker 1: ever you listen to podcasts. Also be show to follow
• 27:03
  Speaker 1: me and John on exor Twitter at marinas w and
• 27:06
  Speaker 1: John Underscore Stepping. This episode was produced by Samasardi and Moses,
• 27:10
  Speaker 1: and sound designed by Blake Maples and Aaron Casper. Questions
• 27:13
  Speaker 1: and comments of this show and all our shows are
• 27:15
  Speaker 1: always welcome. Our show email is Marimoney at Bloomberg dot