Is It The End Of The Golden Age Of U.K. IPOs?
This year has been the best year for U.K. real estate initial public offerings by a country mile.
According to data from investment bank Stifel, eight companies raised £1.3B in IPOs in 2017. This follows on from £618M raised in 2016, and more was raised in this two-year period than all years since the financial crisis combined.
But earlier this month light-industrial specialist M7 cancelled plans to raise between £150M and £300M through an IPO. As one of the best operators in its sector it had been expected to achieve its aim easily. It said it had received enough commitments from potential shareholders to push on with an IPO, but thought it would achieve a higher price selling the portfolio in the private market.
“I think a few people might have missed the boat in terms of timing for new IPOs,” BDO partner Ed Goodworth said. “There has already been quite a lot of money deployed in the last year, and if you’re an investor that does have further funds you are more likely to deploy it with an existing REIT.”
Two other managers are on the road trying to float new companies. Aviva is looking to raise £200M for a long-income REIT, and Aberdeen Standard is looking to raise £250M for a European logistics REIT. But experts say it is touch and go if they will cross the line.
“It is coming to the year and for the time being I wouldn’t be surprised if it is difficult to get deals done,” Green Street Managing Director Hemant Kotak said. “Also M7 said that there was stronger interest in the private market, which is not surprising given light industrial is a vogue sector right now.”
Even if the winning run for IPOs has come to an end, the last two years have fundamentally changed the nature of listed U.K. real estate. The companies that have successfully floated since the beginning of 2016 are mainly targeting emerging niche sectors and have a greater focus on long income rather than trading and development.
Civitas, PRS REIT, Triple Point and Residential Secure Income are all residential specialists. Warehouse REIT and the Aberdeen Standard REIT on the road are targeting logistics. AEW, Supermarket Income REIT and LXI and the Aviva REIT are all targeting very long leases.
“There’s clearly been appetite for specialist REITs with low gearing and long income,” Goodworth said. “That’s something the market has been saying for a long time. Investors in REITs are targeting particular sectors rather than just saying to companies, here’s my money, you decide what to invest in. There is a desire for them to control the sectors they have exposure to.”
“Long income in general has been popular,” Kotak said. “Income is seen as very important and will generate better returns going forward given that we are late in the real estate cycle.”
The message being sent by investors in the companies they are backing is something existing REITs are increasingly taking heed of, or at least should be. The biggest premiums to NAV in the listed real estate sector are all at companies with secure long income — self-storage companies like Big Yellow or Safestore, or logistics firm LondonMetric.
“This sort of market and strategy was exactly what a REIT was supposed to do,” LondonMetric Chief Executive Andrew Jones said. “Very few of the real estate companies that converted [to REITs in January 2007] behave as true REITs. They got a tax break but didn’t actually change their real estate strategy and are not focusing on income. The iPhone was launched at the same time as REITs in 2007 — one of those things has evolved considerably, the other hasn’t.”
In terms of how this new raft of listed companies will fare going forward, Goodworth predicts consolidation because of their small size, and because having a lower net overhead is key to increase income.
“The new REITs are all currently fairly small as far as listed entities go,” he said. “I expect some to raise further funds to achieve critical mass or consolidate.”
With some of the biggest REITs trading at significant discounts to NAV and producing some of the worst returns in the sector, their new smaller brethren have shown them the way. If investors continue to favour the strategy of their new brethren, the big beasts will be forced to adapt.