How many more listed Reits will go private?

At the end of last month, US private equity giant Blackstone made headlines when it took aim at listed property companies – arguing that the Reit (real esate investment trust) market is too volatile.

“I don’t know how many times the Reit market has gone up or down by 10 per cent or more over the past decade,” Blackstone president Jonathan Gray told the Financial Times. “It is not necessarily reflective of what’s happening at any one time in real estate […] There’s much greater volatility.”

The comments have raised eyebrows because they come at a time when Blackstone has been gobbling up Reits on both sides of the Atlantic. Last month, it bought listed student housing operator American Campus Communities for $13bn (£10.4bn) and agreed to buy suburban office Reit PS Business Parks in a deal valued at $7.6bn. The two deals follow last year’s purchase of listed out-of-town lodging chain Extended Stay America for $6bn.

In the UK, Blackstone last year bought listed property companies St Modwen and GCP Student Living for £1.27bn and £969mn, respectively. And Blackstone isn’t the only private equity player eyeing up listed Reits – with the Wellcome Trust completing its purchase of Urban&Civic for £506mn last year as well.

So, what does all this mean for the UK’s listed Reit market? How many more of them will be swallowed up by private equity – whether that’s Blackstone or some other party?

When asked by Investors’ Chronicle if they had been approached by private equity, most listed property companies declined to comment – with only one unnamed source confirming that it had been. “But we’re trading at a premium, so private equity can sniff around elsewhere,” the source said.

Yet, despite their silence on the topic, John Cahill, a real estate analyst at Stifel, believes we will see more Reits go private. “It’s already happening,” he says.

“Normally we get minimum levels of M&A activity in the [listed property] sector, but actually we’ve seen a number of companies being taken private over the last few years.”

Cahill explains that normally private equity’s appetite for listed companies tends to be cyclical and predictable. This time, however, Cahill says he is seeing something different.

“In a normal cycle, when companies are trading at a discount, there are obvious patterns – all the logistics business, or all the retail businesses, or whatever. But, actually, this has been sector agnostic.”

Evidence of this can be seen in the lack of similarity in the two Reit purchases which Blackstone made last year: St Modwen is a developer of logistics and residential assets while GCP is a student accommodation operator. This makes guessing which companies could be snapped up next hard to predict.

On the one hand, there are many who say that giants such as British Land (BLND), Landsec (LAND) and Hammerson (HMSO) who are currently trading at a discount might succumb to an offer from a big private equity firm – although those same people argue that the money on the table would have to be quite significant. On the other hand, there are some who say that small caps could be the most likely targets. This is certainly the view of Andrew Jones, chief executive of LondonMetric (LMP).

“Many [small cap companies] suffer from liquidity issues and therefore the shares drift and get disconnected from the underlying valuations of the assets,” he argues.

Jones believes it would be a good thing for these companies to go private as it could create space for new Reits to come to the market. The appetite from retail investors for new listed Reits is certainly there. Life Science Reit floated in November last year after raising £350mn via an oversubscribed share issue.

Jones also thinks that the knowledge that private equity might swoop in keeps a lot of existing Reits on their toes. “I think it’s good that people are held to account,” he says. “And if they are held to account and don’t deliver the results or the right strategies then they have to accept that they might be bid for.”

But will all this merger activity mean the overall size of the listed property market shrinks? “I have no idea,” Jones says. “I believe in efficient markets and I believe that the UK is a terrific place to do business and it’s incredibly entrepreneurial.”

Blackstone itself is also a big defender of the good private equity can do for listed companies it buys. When asked if it was looking to snap up any more UK-listed Reits, a spokesperson said: “Our approach in this area has been to offer a solution to investors seeking an institutional‐quality, income‐oriented product based on enhanced transparency, fees aligned with performance and disclosures required of a public company, all while providing access to Blackstone’s institutional real estate platform. 

“That said, we believe public Reits will continue to be out there at a large scale – this is not viewed as a replacement.”

Not everyone shares Jones’ and Blackstone’s enthusiasm for private equity’s current appetite for Reits, though. Many point to the fact that private equity is – by its very nature – private. Unlisted firms are not held to the same standards of transparency as listed companies. Private equity is also less regulated, which can make shares in a lot of them illiquid for retail investors.

“Shareholders have no liquidity at all in close-ended funds,” explains Stephen Inglis, non-executive director of Regional Reit (RGL). “The money is with the fund manager and they control that money right up until you get it out seven years later.

“At that point, as an investor, you’ve lost all control. Whereas, if you invest in a listed vehicle, you can get off the train at any time. Or you can increase your exposure to that company at any point in time.

Stifel’s Cahill is also no fan of private equity’s ability to create close-ended funds. “I’m amazed these things are still allowed to exist to be honest,” he quips.

“If you as an individual investor bought into a close-ended fund and they gated it for up to 12 months, you might ask for your money back as agreed when you bought the investment but they can say no and tell you to wait. And, in the meantime, if the property values are falling, the value of your investment is falling and you’re stuck.”

By contrast, listed Reits offer more liquidity and transparency for the retail investor. The companies benefit, too. Listed Reits are given tax breaks in exchange for distributing at least 90 per cent of their taxable income for each accounting period to investors. This may explain why almost every listed property company which is eligible for Reit status – whereby at least 75 per cent of the group’s profits derive from rental income – has taken advantage of it.

Housebuilders cannot become Reits as they make money through house sales rather than rental income. Yet, the appeal of Reit status is so strong that even residential developer Grainger (GRI) is looking at becoming a Reit as it shifts its business model towards rental properties, as first reported by Investors’ Chronicle in November last year.

However, there are also many negatives to being a listed Reit which is perhaps why the lure of private equity is so strong at the moment. The first of these is the cash listed Reits have to shell out for their status.

“It costs a lot of money to be listed,” says Cahill. “The bigger you get, the smaller that becomes relatively, but when you’re starting out – it’s a cost you have to bear.”

Regional Reit’s Inglis adds that cash also becomes an issue if shares in your company fall out of favour with retail investors.

“When you’re trading at a discount to NAV, then it’s very difficult to raise money,” he says. “One of the purposes of being on the stock market is the ability to tap the stock market to raise money to make further acquisitions or to enhance your portfolio.

“Your ability to raise capital is limited in respect of your share price at any given moment in time, and that share price is out of your control in many instances – it’s often driven by outside events.”

Cahill explains that the other struggle for listed Reits is the public-facing nature of the business. Listed Reits are required to structure their board in a certain way and to report everything they do to the public. While this is a great thing for retail investors, the businesses themselves do not always relish being in the spotlight.

“You’re constantly at the behest of people like me and you asking questions, and they have to engage with us and they spend an awful lot of time doing that,” he says. “I once tried to work out how many days a chief executive of a large Reit can spend at his or her desk versus seeing investors and it’s a really small number.

“When you’re riding high as a property company – like Segro (SGRO) – to be in the public glare is great. But, if you are intu, which is gone now, you would have spent years and years and years dealing with investors and analysts.”

With almost as many disadvantages as advantages to listed Reit status, figuring out who will succumb to private equity next is a thankless task. What is certain, however, is that there are more takeovers to come.