It’s a rare moment when an entire asset class appears to be trading in the bargain basement. But such is the case with real estate investment trusts (REITs), which have become the overlooked orphans of the investment world.
Shunned during the recent bout of monetary tightening, they now present an oddly compelling value proposition — if one can look past the dust of neglect and the din of pessimism.
For those unfamiliar, REITs are publicly traded companies that own income-generating property — anything from urban offices to logistics hubs to out-of-town retail parks. By law, they must distribute the bulk of their earnings as dividends, which makes them catnip to income-seeking investors. Or at least, it used to.
Recent years have not been kind to the sector. Higher interest rates, wobbly valuations, and a general sense of economic foreboding have conspired to keep REITs trading at substantial discounts to the net value of their underlying assets.
“Many are trading at significant discounts to their net asset value, offering investors the chance to acquire real estate below its true value,” said Kenneth MacKenzie, CEO of the Target Healthcare REIT LON:THRL. “This gap reflects past market headwinds, including high interest rates and sector-specific pressures.”
But now, the pendulum may be swinging back. There are whispers in the markets that the Bank of England may be ready to take its foot off the monetary brakes. The mere suggestion of easing rates has been enough to rekindle interest in income-generating assets. And REITs, still languishing at double-digit discounts to asset value, are drawing attention from those with a contrarian bent.
UK property market fundamentals are changing
The appeal isn’t just speculative. Under the surface, the fundamentals of the property sector are quietly strengthening. Rents are on the rise again — not because of frothy market exuberance, but due to a decade-long underinvestment in development. Since the financial crisis, the pipeline of new commercial property has thinned dramatically. Banks, once the financiers of speculative building, beat a hasty retreat from development lending, leaving a vacuum that has yet to be filled. The consequence? A chronic shortage of high-quality space, particularly in logistics and well-located office properties. Where demand meets scarcity, rents inevitably rise.
This isn’t the sort of boom that ends in tears. Rather, it’s a slow-burning, structural recalibration. Tenants — and not just the glamorous tech unicorns — are increasingly selective. They want buildings with strong environmental credentials, good access to transport, and all the trappings of modern working life. The suburban 1990s office park with a leaky roof and nowhere to buy a coffee is, unsurprisingly, out of favour.
“With further rental growth to come, the window of opportunity to invest in UK REITs at an opportune time remains wide open for investors who have so far been slow to react to the improving prospects for UK real estate,” said Richard Shepherd-Cross, Investment Manager with the Custodian Property Income REIT LON:CREI. “Many REITs continue to trade at wide discounts to NAV. I do not believe that current ratings reflect the true worth of the REITs, where it remains possible to buy in at share prices reflecting dividend yields of 5% to 7.5%, with those dividends fully covered by the earnings of the company.”
Meanwhile, merger and acquisition activity in the REIT space is heating up. Larger players and private equity firms are circling the sector, drawn by the wide discounts and potential for value extraction. It’s a simple trade: buy £1 of property for 80p, and wait for sentiment to catch up. These corporate takeovers may be distasteful to some, but they do serve as a reminder that the assets themselves remain sound — and in many cases, undervalued.
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Of course, not every REIT is a diamond in the rough. The sector is polarising, with performance increasingly dependent on sub-sector selection and asset quality. Prime logistics, urban mixed-use, and retail parks catering to essential services are all seeing strong demand. In contrast, some older offices and marginal retail properties continue to suffer from obsolescence. The smart money is moving selectively, favouring trusts with disciplined management, low leverage, and the ability to reinvest into a market rife with mispricing.
Investors are chasing yield from REITs
But the real draw — the old faithful — remains income. Yields of 5% to 7.5% are not uncommon, and in many cases these dividends are well covered by earnings. For investors starved of reliable cash flow in recent years, this is no small thing. After all, while capital returns ebb and flow, the ability to generate income from bricks and mortar has enduring appeal. And when acquired at a discount, the potential for capital upside sweetens the proposition.
That said, risks abound. The spectre of refinancing looms large over parts of the sector. Many trusts entered this cycle with cheap debt locked in, but maturities are approaching. Renewing that borrowing at today’s rates could erode earnings — unless rents rise swiftly enough to compensate. There’s also the perennial threat of being scooped up by opportunistic private capital at an inopportune price.
And then there’s the macro fog: what if rates stay higher for longer? What if inflation flares again? What if, heaven forbid, demand for physical space declines in the face of remote working and automation? These aren’t trivial risks, and they help explain the ongoing discount.
“Structurally supported sectors such as multi-let industrial estates and convenience led retail warehouses will benefit most, and these represent 63% of [our] portfolio,” said Bradley Biggins, a fund manager with the Schroder Real Estate Investment Trust LON:SREI. “There has only been modest capital value growth since the correction, so rental growth combined with modest yield compression as we progress through an interest rate cutting cycle should support capital values and combined with an attractive income return, will result in above average total returns in the coming years.”
Still, the contrarian case is clear: when sentiment is low, value often hides in plain sight. REITs may not be fashionable, but they offer something increasingly scarce — solid assets, dependable income, and the potential for reappraisal. For the patient investor willing to look past the market noise, the foundations look surprisingly sound.
