1. UK REIT Industry Landscape

REIT (Real Estate Investment Trust) industry encapsulates a list of companies that facilitates investors to put their money in the units of a portfolio of real estate assets without even owing physical property itself. REITs own diverse commercial real estates’ such as office & apartment buildings, warehouses, hospitals, shopping centers, hotels, and commercial forests. REIT’s can be classified into two types: Equity REIT & Mortgage REIT. It acts like the mutual funds where investment in real estate as an underlying asset to generate increased returns for the shareholders. REIT was introduced in the UK during 2007 with an aim to enhance investment in the real estate market.

UK REITs distributes around 90% of their taxable income for each accounting period to investors, where the income is considered as property rental income. According to the most recent report by EPRA, the industry encapsulated 59 companies with a market capitalization of approximately £55 billion. With reference to the FTSE ICB sub-sector data, the Diversified REITS accounted for the major chunk of the market cap. According to Nationwide, the UK house price increased by around 0.7% during October 2021 when compared with the prior month.

Key Trends in the REIT Sector

Risk Exposures to the REIT Sector

• Operational Risk: The delay in the project deliveries amid the Covid-19 pandemic can also lead to financial penalties. Moreover, the inadequate supply or availability of land or new sites can hamper the growth strategy. Furthermore, increased competition could increase land prices or make it harder to secure attractive sites.
• Macro-economic Uncertainty: Economic downturn and economic volatility can significantly impact the real estate market and consumer confidence.
• Reduction in consumer spending: The rise in unemployment levels and reduction in disposable income may cause a decline in consumer spending tendency, which could adversely impact consumer demand.

SWOT Analysis

Benchmark Index Performance

Based on the last one-year performance, the FTSE All-Share Real Estate Investment Trusts index has outperformed the FTSE 100 and FTSE 250 index. The FTSE All-Share Real Estate Investment Trusts index generated a return of about 32.20%; however, the FTSE 100 index generated a return of approximately 17.64%, and FTSE 250 index produced a return of around 24.33%

Figure 1: One Year Benchmark Index Performance

(Data Source: Refinitiv, Chart created by Kalkine Group)        

REIT Sector Outlook

The UK Government had announced several modifications in its most recent Autumn Budget in the first phase, introducing from April 2022. The listing criteria for the number of shares held by institutional investors are changing from 99% to around 70%.  Furthermore, REIT will no longer be taxed for the shareholders that have at least a 10% holding in the REIT.

Moreover, the removal of government stamp duty holiday would hardly impact the land completions for the medium term. The industry had witnessed an accelerated recovery in 2021, with the pace of improvement driven by the availability and effectiveness of a vaccine. In comparison, the vacancy rate demonstrated a significant rise in 2020 irrespective of property type, be it commercial or retail space. The UK listed REITS provide lower dividend yield when compared with REITs listed on S&P 500. Overall, the ease of listing rules announced by UK government in the recent autumn budget will compel more companies to get listed on LSE.

2. Investment analysis and stocks under discussion (CAPC, GWI, BBOX)

After gaining insights into the REIT sector, we would look at the business model of three REIT players listed on the London Stock Exchange.

A. Capital & Counties Properties PLC (LON: CAPC)

(Recommendation: Speculative Buy, Potential Upside: 10.68%, Market Capitalization: GBP 1.47 billion)

Capital & Counties Properties PLC is an FTSE 250 listed United Kingdom-based property investment and development company focused on sites in the West End of London.

The company had paid an interim dividend of 0.5 pence per share on 23 September 2021, while the ex-dividend date was 26 August 2021.

One Year Share Price Chart

(Data Source: Refinitiv, Analysis by Kalkine Group)   

From a technical standpoint, the MACD line remained above the signal line, indicating an upside potential in the stock price.

Valuation Methodology

Our illustrative valuation model suggests that the stock has an upside potential of 10.68% over the closing price of GBX 170.00 (as of 09 November 2021).

B. Globalworth Real Estate Investments Limited (LON: GWI)

(Recommendation: Speculative Buy, Potential Upside: 16.75%, Market Capitalization: GBP 1.14 billion)

Globalworth Real Estate Investments Limited is an FTSE listed one of the leading real estate companies in Central and Eastern Europe, focusing on Poland and Romania.

GWI had paid an interim dividend of EURO 0.15 per share on 01 October 2021, while the ex-dividend date was 09 September 2021.

One Year Share Price Chart

(Data Source: Refinitiv, Analysis by Kalkine Group)

From a technical standpoint, the stock is hovering between the lower Bollinger band and the middle Bollinger band, indicating an upside potential in the stock price.

Valuation Methodology

Our illustrative valuation model suggests that the stock has an upside potential of 16.75% over the closing price of EURO 5.97 (as on 09 November 2021).

C. Tritax Big Box REIT PLC (LON: BBOX)

(Recommendation: Watch, Potential Downside: 22.19%, Market Capitalization: GBP 4.22 billion)

Tritax Big Box REIT PLC (LON: BBOX) is an FTSE 250 index listed real estate investment trust and is dedicated to large logistics warehouse assets (Big Boxes) in the UK.

BBOX will pay an interim dividend of 1.60 pence per share attributable for Q3 FY21 on 17 November 2021, while the ex-dividend date was 28 October 2021.

One Year Share Price Chart

(Data Source: Refinitiv, Analysis by Kalkine Group)

From a technical standpoint, the stock price is hovering between the upper Bollinger band and the middle Bollinger band, indicating a correction in the stock price.

Valuation Methodology

Our illustrative valuation model suggests that the stock has a downside potential of 22.19% over the closing price of GBX 227.60 (as on 09 November 2021).

*All forecasted data and peer information have been taken from REFINITIV.

*The reference data in this report has been partly sourced from REFINITIV.

*The "Speculative Buy” recommendation is also valid for the current price as covered in the report as on 10 November 2021.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached.

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