What recent property takeover action reveals about UK real estate
Recent M&A activity shows the discounts to net asset value (NAV) endured by many property stocks are attracting interest from within the industry, showing UK assets still have appeal despite Brexit.
However, the £415m bid from LondonMetric Property (LMP) for A&J Mucklow (MKLW) at the end of May may have been the exception in that it was successful and pitched at a premium to NAV. Other recent bids for property groups have come in below NAV.
Mucklow’s situation suggests the industrial sector remains much more popular than offices and, even further down the food chain, retail.
Office-owner Helical (HLCL) has assets in Manchester and London and its shares currently trade at an 18% discount to NAV.
Outside of London, and notwithstanding Brexit uncertainty, the market for offices is supported by supply constraints. Since the financial crisis there have only been a limited number of new office developments beyond the capital. Outfits such as Midlands-focused Real Estate Investors (REI) and Regional REIT (RGL) look better plugged into this trend than Helical.
While the positive story for regional offices is perhaps under-appreciated by the market, the same cannot be said for industrial assets.
The requirement from online retail for storage and sorting facilities has led to a boom in demand for warehouses and, in this context, it is perhaps little surprise Mucklow’s portfolio of industrial and distribution assets in a relatively strong West Midlands economy attracted an 11.4% premium to NAV bid according to investment bank Liberum.
Bid activity in the retail property space has foundered amid uncertainty over exactly where the floor for valuations in this space lies. In 2018 this scuppered a merger between shopping centre investors Hammerson (HMSO) and Intu (INTU) and saw Hammerson reject a £5bn offer from France’s Klepierre.
The turmoil in the retail sector is reflected in a faltering rescue plan for Philip Green’s struggling Arcadia which owns Top Shop and Burton.
Intu, among its largest landlords, is believed to be opposed to the proposals which encompass a CVA agreement. This is an insolvency process that allows financially-challenged companies to renegotiate debts with creditors including landlords. It inevitably sees landlords having to accept lower rents to avoid vacant lots.