UK Reits: Conversion has been priced
by Edmund Craston, managing director, head of European real estate investment banking, Lehman Brothers
The relative underperformance of UK property stocks, particularly the Reits, since January 1, is not really a reflection on Reit conversion itself. The sector had a strong run in 2006 leading up to conversion, and the economic benefits of Reits were understood and priced in by the market before the turn of the year (although some analysts had not adjusted their NAV estimates for the conversion charge until then). The recent underperformance is really a factor of increased investor caution about the underlying property market, such as the widespread belief that yield shift has run its course and concerns about the impact of rising interest rates on the direct market. Also, some company results have not quite met expectations. Some non-Reit stocks benefit from specific factors keeping their prices higher, such as takeover speculation and increased market confidence in the company’s ability to deliver superior returns through development.
It is interesting that property share liquidity has improved dramatically prior to and following the introduction of Reits, reflecting broader investor interest in the sector. This is particularly the case for Reits that are mainly larger caps. Lehman has seen generalist investors rotating out of liquid stocks in the sector recently, to be replaced by sector specialists who see the long-term and relative value of UK Reits.