At Shares, we have been flagging the potential for M&A in the investment trust space for months, not least in the REIT (real estate investment trust) sector due to the abundance of companies trading well below their net asset values.

In the last month alone, three real estate mergers have been announced – between LondonMetric (LMP) and LXI (LXI), Tritax Big Box (BBOX) and UK Commercial Property (UKCM), and Custodian Property (CREI) and Abrdn Property Income (API).

Just last week, however, a new contender entered the frame as Urban Logistics (SHED) made a counter-offer for API at a premium to the Custodian deal, potentially signalling the start of a bidding war for UK commercial property assets.

Urban Logistics approached the Abrdn trust with an all-share offer which valued the latter at 59.2p on the day of the announcement, a 23% premium to its undisturbed share price the day before the Custodian deal was made public and a 13% premium to the Custodian offer.

Urban Logistics claims the two are a good fit as only 9% of the combined portfolio would be outside of logistics and retail warehousing, in addition to which it knows the API assets well.

As chief investment officer Justin Upton admitted to Shares recently, ‘if API assets came up on the open market, we would definitely bid on them’.

Despite this commercial logic, convincing API shareholders may be another matter as over a quarter of the shares are owned by retail investors who appreciate the 7.7% yield and quarterly dividend payments, whereas Urban Logistics has a lower yield and pays a semi-annual dividend.

Also, 9% of API’s shares are held by wealth management firm Mattioli Woods (MTW), which happens to own Custodian Capital Ltd, the manager of the Custodian REIT, and would presumably rather see the latter take control.

More broadly, according to the AIC (Association of Investment Companies), the average UK commercial property trust trades at a discount of 20% to NAV (net asset value).

At the same time, most of the managers talk of 30%-plus positive reversion in rents over the next five years, which together with the average discount must make this one of the most interesting areas of the market not just in terms of potential income upside but also capital appreciation.

We suspect more deals are already in the pipeline as companies realise it’s now or never if they want to take a bigger share of the commercial property market at an unrepeatable price.

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