Tenants will have to ‘accept higher rents’

Demand for property such as warehouses has jumped in recent years

There’s going to be a lot “more M&A” in the real estate sector, according to Marcus Phayre-Mudge, fund manager of TR Property, the £1.1bn real estate-focused investment trust.

The fund manager told City A.M. that the “low-hanging fruit” in the sector had been taken out, but “there’s more to come” as companies, especially smaller real estate investment trusts, are forced to merge.

Mergers helped the trust outperform its benchmark over the past year. TR Property produced a total return for the year of 22.9% per cent, with its net asset value up 21% compared to its benchmark return of 15.4 per cent.

Four of the company’s holdings were bought out during the year, and a fifth deal was announced post-year end.

“Boards are under a lot of pressure to unlock value,” said Phayre-Mudge. “There’s a general ground swell around an externally managed business where fees are based on asset values, but the share price is a long way from that value,” the fund manager added.

The sector has been grappling with discounts for years. Real estate investment trusts (REITs) report net asset values (NAV) to the market, but these figures are only estimates based on third-party valuations.

Investor scepticism about these values has pushed REIT shares to wide discounts to underlying NAV, especially in volatile sectors, such as offices and retail property.

“People are still concerned about the general underlying value of offices”, Phayre-Mudge said, but there’s still strong demand for “best-in-class office space across London.”

That demand prompted West End developer Great Portland Estates (GPE) to go to shareholders to raise £350m last month to help fund its development pipeline. That followed property giant Segro, which went to shareholders earlier in the year to raise £800m to meet demand for new warehouses and data centres. It later increased the fundraising to £900m due to strong investor interest.

“There’s every reason for companies to raise capital in markets where rents are growing,” the fund manager told City A.M. He went on to add: “We think if you build it, they will come.”

Rents will continue to rise

It’s not just a case of matching supply and demand; it’s also about unlocking the supply in the first place. Thanks to regulation and inflation, the cost of building has spiralled, and in most sectors, it’s uneconomic to spend money on a new building.

As a result, “tenants are just going to have to accept higher rents as there’s no property available”, Phayre-Mudge summarised.

Nowhere is this more apparent than in the residential sector, both here in the UK and around the world. “Residential is the same everywhere. There are not enough buildings being built,” the fund manager said.

These dynamics have made the listed real estate sector very appealing from an income perspective. “We’re seeing dividends increasing. Companies that may have paused dividends are reinstigating…we’re very confident of further growth.”

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