- LondonMetric and Schroder REIT launch all-stock offer for Picton Property Income REIT
- Proposed deal is the latest in a long line of REIT takeovers this decade
- Target’s share price retreats all the same, to levels last seen in 2008
- Rising gilt yields are a further challenge to depressed REIT valuations
“A share buyback from Derwent London and a takeover bid for Picton Property Income could be reasonably expected to give a lift to the struggling Real Estate Investment Trust (REIT) sector, as both potentially highlight the deep discounts to net asset value (NAV) at which many property landlords’ shares trade,” says AJ Bell investment director Russ Mould.
“However, neither Derwent’s nor Picton’s share price is stirring, as the murky economic outlook, long-term challenges which face the property sector and rising UK government bond (or gilt) yields combine to dampen sentiment and interest in the REIT sector.
“Picton Property Income put itself up for sale in January. LondonMetric Property first expressed an interest the following month and then tabled a joint proposal alongside Schroder REIT in March. The consortium has now made a firm offer which is failing to catch the imagination of investors in Picton, given how the share price is falling sharply in response, even though Picton is recommending the transaction.
“Picton’s shares now trade below the 77.5p mark at which they stood when Picton first put itself up for sale and the subsequent high of 89p reached after LondonMetric first confirmed it was looking at a deal.
“The all-stock element may be one reason for the disappointment, and another may be the tiny premium to the undisturbed share price of January, which is barely 1% under the terms of the offer. The discount to Picton’s last stated NAV per share of 102.4p represented by the 78.2p per share bid may not help stoke interest, either, even if it comes in below the 29% discount to book value which prevails across London-listed REITs.
“The offer also implies a higher discount to NAV than that seen across a raft of other bids for REITs in the past four years.
Source: Company accounts
“As a result, Picton’s share price is no higher than it was 18 years ago, just as the Great Financial Crisis was starting to grip the world in 2008.
Source: LSEG Refinitiv data
“Investors seem similarly disinterested in Derwent London’s £50 million share buyback, even if the thinking behind the plan is sound. Its shares languish at a mark no higher than that seen in summer 2007, before the Great Financial Crisis broke.
Source: LSEG Refinitiv data
“Derwent London’s shares trade at a 47% discount to NAV, or book value, per share. The FTSE 250 index member is therefore buying back assets at a price of just 53p in the pound, and this makes more sense to investors than constructing a building that automatically draws a valuation of just 53p for every £1 spent.
“That discount to NAV is one of the deepest among the listed REITs and in general investors seem more sceptical about office space than they do other forms of property, judging by which REITs and which sub-sectors attract the lowest and highest discount valuations.
“This may reflect worries over the impact of flexible, or hybrid, working, the sluggish nature of the UK economy and the cost of constructing new buildings. Trade press reports continue to flag a shortage of high-end, high-spec office space, but this is not cheap to build and older buildings are expensive to refurbish, especially as they must meet exacting standards from employees and tenants and meet ever-stricter environmental and emissions regulations.
Source: Company accounts, LSEG Refinitiv data
“Flexible working is just one perceived threat, alongside the relentless onslaught from online rivals that brick-and-mortar retailers must face and wider questions over the UK’s economic trajectory.
“Such concerns mean the FTSE 350 REIT index stands no higher than it did in late 2008 and at less than half the level at which it launched in late 2006.
Source: Company accounts, LSEG Refinitiv data
“The post-Great Financial Crisis recovery, when investors reached for reliable yield during an era of zero interest rates, is well and truly over, especially as gilt yields are rising.
“Investors seem to be giving up hope on the Bank of England cutting interest rates in 2026 and are even pricing in hikes in the headline cost of borrowing. Throw in fears over inflation, thanks to energy and oil prices, and worries over the trajectory of government borrowing under the current prime minister and chancellor, let alone potential new incumbents in numbers 10 and 11 Downing Street, and gilt yields are on the march.
Source: Company accounts, LSEG Refinitiv data
“The higher gilt yields go, the less attractive the dividend yields available from the REITs may look on a relative basis. A move above 5.00% on the benchmark 10-year gilt is therefore an additional challenge for REITs’ share prices, even if the average forward dividend yield on the sector for 2026 is some 6.6%. Investors seem to think that the premium yield on offer may be insufficient to compensate themselves for risks associated with holding the REITs’ stock and their business models, at least in the current economic and interest rate environment.”
Source: Marketscreener, consensus analysts' forecasts, LSEG Refinitiv data
