Shareholders are often told that they should be “greedy when others are scared, and fearful when others are greedy,” as veteran fund manager Warren Buffett puts it.
But in the current climate, it’s wise to weigh the arguments before snapping up so-called “oversold” and therefore incredibly cheap stocks.
Take for example Reits – real estate investment trusts – such as British Land, Land Securities, Segro and Tritax Big Box. These groups have offices, stores, logistics sheds that serve e-commerce, and data centers that power the Internet.
REIT stocks were dragged lower by higher interest rates and the mini-budget fallout. The prices of some are sharply reduced relative to their net asset values, with logistics real estate funds being particularly affected.
But predictions that the commercial real estate crisis may be coming to an end are making Reits more attractive.
Jennet Siebrits, head of UK research at consultancy CBRE, says “the green shoots of the recovery will materialise”.
Matthew Saperia and James Carswell of brokers Peel Hunt agree, saying: “We are optimistic the bottom is near.” As a result, they upgraded British Land, Land Securities and ten other Reits to a “buy”, including Workspace and Lok’n Store, the storage group.
But Goldman Sachs predicts commercial property values will fall 15-20% by the end of 2024 – and nerves have been rattled by controversy over social housing specialist Home Reit.
James Yardley of Chelsea Financial Services argues that it is risky to conclude that stock price declines are overdone, since REITs are at the mercy of so many macroeconomic forces. “Some may not be as cheap as they look,” he says.
Recent statements by some Reit executives underscore this uncertainty. Brian Bickell of Shaftesbury – the main owner of Covent Garden and Soho – said his bars and shops were busy over Christmas but rail strikes are now a threat.
Andrew Coombs, boss of Sirius Real Estate – which operates business parks in Britain and Europe – warns that “UK inflation is going to be tougher for longer than it will be in Europe”.
Meanwhile, due to the lockdown, employees have heightened expectations for office quality if they are to be tempted into working from home.
In 2023, a workplace must be sustainable, with facilities such as rooftop terraces and in-house baristas. Listen, as I did, to the conversations between estate agents and clients visiting properties in the West End and you’ll hear a litany of features that need to be upgraded or redesigned to attract tenants.
There are potential buyers, but as one insider put it: “There are such difficulties with finances that they are lagging behind.”
In this context, some real estate funds are trying to get rid of offices and shopping centres, a necessity due to their “scalable” structure, which obliges them to raise cash if investors wish to redeem their stakes.
And some funds prohibit such redemptions. Investors valuing REITs can rest assured the “closed” structure of these real estate vehicles means they are not under pressure to stage asset fire sales when investors sell shares.
These sell-offs present opportunities for Reit managers.
Laura Elkin, Director of AEW, says: “We identify assets with strong professional demand that are mispriced relative to long-term fundamentals.” But “uncertain career prospects” mean she avoids the office. The dividend yield on AEW is 7.5%. Decent returns are one of the reasons Reits are gaining fans.
Ben Yearsley of Shore Capital says he’s “chomping” on Reit shares, while acknowledging the likelihood of dividend cuts.
By law, a REIT must pay out 90% of its taxable profits as dividends each year. But in some cases, these payments are not fully covered by income and may be reduced.
I’ve decided to be a bolder investor in 2023, which means I’m considering a little adventure in land.
Numis recommends LXi Reit and Industrials Reit, for their management. I am also considering Land Securities, a FTSE 100 company with 24m² of office, retail and other space. Its portfolio includes the Piccadilly Lights – the big screens in central London.
His answer to the WFH Doctrine are office buildings such as Capital Forge, with all new essentials. I hope that its managers will “work” on this point and on the other assets.
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