REITS - Is this a safe alternative to equities?

Sunday, Nov 19 2017 by

On the face of it, REITS seem to pay a decent Dividend yield, and It looks like a reasonably safe investment backed up by property values. I appreciate anything exposed to the high street looks like quite high risk at the minute, and London property values have looked a bit shaky. But after a bit of digging around there seems to be a whole host of these trading below book value.

Why is this? Is it a general lack of confidence in the true value of their property values?

Would I be right in saying that 'Long Term Investments' on their balance sheet is the book value of what they have paid for their properties?

I appreciate holding these could be a risky play if their general LTV is high and they very exposed to sudden interest changes on the huge amounts of debt they take on.

What would be a acceptable ballpark figure for LTV, considering where interest rates are at the minute?

My current outlook is that, there is a lot of noise about investors coming out of equities and moving into cash. which is perfectly sensible. But would it be more efficient to find a REIT paying a decent dividend and trading below book value to give some degree in confidence protecting the underlying value?

Its not a topic or an area I know much about at all, so please excuse the questions if they seem daft! if anybody in particular knows this area well, I would appreciate your insight also if they point me towards any articles on the subject, that would be most appreciated.


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9 Posts on this Thread show/hide all

paraic84 20th Nov '17 1 of 9

Although not a REIT you may want to look at Palace Capital (LON:PCA) which pays a decent dividend and looks very undervalued compared with its NAV (I hold). The company has also executed very well, making rare purchases and getting good returns on its properties.

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Wiliam Jones 20th Nov '17 2 of 9


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Wimbledonsprinter 20th Nov '17 3 of 9

The two bell weather REITS in the UK (Land Securities (LON:LAND) and £BLND) are trading at 35% discount to NAV. Note this does not allow for a 35% fall in asset values as you need to take account of the debt in each company and the committed development projects - but by my calculations both companies share prices allow for a 20%+ fall in the underlying value of their properties. Both companies have high quality tenants on long leases. I think this offers good value - but I owned bought both around a year ago (post referendum) - and they have been drifting downwards since. Both companies have fairly low LTVs by historic standards - and anything you invest in you should compare with these two.

Both Land and British Land have London office and retail exposure. London office is currently looking over supplied and therefore there is little prospect of uplift. On the retail side, I think is the real long-term risk (the Amazon on-line effect). I think UK REITS are suffering following the appalling performance of the US REITS (driven by this effect - as well as them generally being much more aggressively geared than in the UK).

Therefore, I agree with you that they are a reasonable investment - but they are certainly not without risk - and I am not sure I would feel comfortable thinking them as a substitute for cash.

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smatthews1 21st Nov '17 5 of 9

In reply to post #243188

Thanks for your input, they are very valid points, it was an area you don't read about much so wanted to throw it out there.

With regards to high risk circulating around UK retail properties, maybe the shift from high street to online can benefit those in specialising in warehousing? Tritax Big Box Reit (LON:BBOX) is the only one that comes to my mind at the minute, but I am on the search for others.


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Wimbledonsprinter 21st Nov '17 6 of 9

In reply to post #243463

Yes. Also look at SEGRO (LON:SGRO). But I think like Tritax Big Box Reit (LON:BBOX), does not trade at a discount to NAV - so maybe more secure (at least from Amazon effect) but not as cheap.

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JMLDutch 21st Nov '17 7 of 9

In reply to post #243473

Just had a look at Tritax Big Box Reit (LON:BBOX) as well. They seem to be doing a lot of acquisitions funded with equity. Sharecount more than tripled in 3 years. Seems risky although admittedly the shareholder returns have been attractive.

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Graham Ford 21st Nov '17 8 of 9

I think it is necessary to remember that although these are asset backed in the sense that they own offices, warehouses etc., they are also subject to a lot of sentiment as to where we are in the cycle and the over or under supply of particular sectors. If they are trading at a big discount there’s a reason for that.

For something that may be a bit steadier it may be worth looking at infrastructure funds.

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pka 21st Nov '17 9 of 9

If anyone is considering buying REITs as a substitute for cash, looking at their share price graphs over the period of the Credit Crunch might be educational. Land Securities, for example, went from a price of 2011 pence on 1/2/2007 to 410 pence on 1/3/2009.

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