Given the depressed valuation of the UK stock market – and the even more depressed valuation of UK commercial property – it was only a matter of time before someone came up with a fund to seize on the opportunities on offer.
Enter Special Opportunities REIT, a new internally-managed real estate investment trust aimed at capitalising on the abundance of value in the UK commercial property sector ‘at scale’ to deliver double-digit returns.
THE PRICE IS RIGHT
Chaired by Harry Hyman, founder and chief executive of Primary Health Properties (PHP), the £1.25 billion FTSE 250 healthcare REIT, the new vehicle is targeting between £250 million and £500 million from subscribers in the biggest IPO (initial public offering) in the real estate sector for over a decade.
‘Cornerstone’ investors, who have yet to be revealed, are expected to account for around a third of the fund, while management will subscribe for £3.6 million giving them proper ‘skin in the game’. The expected launch is June.
The company is targeting a return of between 12% and 15% per year in its base case scenario, and up to 20% per year in an upside scenario, while running costs are estimated to be no more than 7% to 5% of EPRA (European Public Real Estate Association) income.
Leverage is projected at 25% loan-to-value with a cap of 35%, while the dividend is pitched at 6%-plus based on the IPO price and a guaranteed minimum of 3% in the first year after IPO.
Management consists of the former team at the helm of LXi REIT, which was acquired last year by LondonMetric Property (LMP), led by chief executive Simon Lee and chief financial officer Freddie Brooks.
Together with former LXi colleagues John White and Rob Ward, the team has an impressive track record having acquired over £4 billion of assets and generated an average IRR of 20% per year on disposals.
The managers believe the UK property market is at or near the bottom of the cycle and there is an opportunity to acquire good-quality but poorly-managed assets from distressed sellers at a significant discount.
Starting with a clean sheet of paper and no ‘legacy investments’ or leverage, the company aims to acquire a portfolio with lot sizes ranging from around £5 million to £50 million ‘at scale’ while existing REITs are struggling with enormous discounts to NAV (net asset value) and unable to raise funding to capitalise on the opportunities on offer.
On top of the undervaluation of commercial property, rents are well below ERV (estimated rental value) meaning there is significant upward reversion potential which could boost earnings and dividends.
COMPETITION HEATING UP
In a further sign that not only could the price be right but the timing could also be right, Great Portland Estates (GPE) announced last week it had acquired the long leasehold interest in The Courtyard, Alfred Square – just off Tottenham Court Road, north of Bedford Square – which it will refurbish with best-in-class work spaces, a roof terrace and re-configured retail space.
The building is in a prime West End location and is opposite another GPE office development which is due to come on stream in the fourth quarter, forming a cluster of fully-managed buildings totalling over 100,000 square feet.
GPE also launched a fully-underwritten £350 million rights issue to ‘capitalise on the compelling new investment opportunities in central London’ as it put it.
‘Higher interest rates have disrupted the commercial property investment market, creating significant near-to medium-term acquisition opportunities in central London with values approaching their trough and assets trading broadly in line with 2009 real capital value levels,’ said the firm.
With prime office demand remaining robust and current levels of vacancy remaining low, GPE sees market conditions remaining favourable and expects new office supply within London to tighten, underpinning future rental growth, and it believes now is the time to raise cash for further acquisitions and developments.
MORE CONSOLIDATION ON THE CARDS
On the same day GPE launched its cash raise, retail and leisure REIT Capital & Regional (CAL) revealed it had been approached by two different suitors briefly raising the prospect of a bidding war.
On 19 April, the company received an indicative proposal from South African-based Vukile Property Fund (VKE:JSE) regarding a possible cash and share offer.
Vukile subsequently announced on the 23 May that it had no intention of making a bid. Also in April, Capital & Regional said its majority shareholder Growthpoint Properties had received a preliminary approach involving a cash and shares offer from London-listed NewRiver REIT (NRR), which is also retail-focused.
NewRiver, which admitted it hadn’t communicated its proposal to Capital & Regional but only to its major shareholder, argued the two firms had a complementary mix of assets, while the acquisition of The Gyle outside Edinburgh had led to an improvement in the overall quality of the latter’s portfolio.
A combination with NewRiver would create a business with assets under management of £1.7 billion and would benefit from increased share trading liquidity, a bigger index weighting, better debt optionality and potential cost of capital improvements, said the firm.
These articles are provided by Shares magazine which is published by AJ Bell Media, a part of AJ Bell. Shares is not written by AJ Bell.
Shares is provided for your general information and use and is not a personal recommendation to invest. It is not intended to be relied upon by you in making or not making any investment decisions. The investments referred to in these articles will not be suitable for all investors. If in doubt please seek appropriate independent financial advice.
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