Interactive Investor

Ian Cowie: is this a sign an out-of-favour area has hit the bottom?

Our columnist shares a reason for optimism that may prove to be the turning point for this out-of-form part of the market.

29th February 2024 10:16

by Ian Cowie from interactive investor

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Nobody rings a bell at the bottom or the top of the market but this week’s £907 million placing of shares by Segro (LSE:SGRO), the FTSE 100-listed real estate investment trust (REIT), to fund further acquisitions, might just indicate that commercial property share prices are near their nadir or low point.

Shareholders in the Association of Investment Companies (AIC) “Property: UK Commercial” and “Property: Europe” sectors could be forgiven for sincerely hoping things cannot get much worse, because both are trading at double-digit discounts to their net asset values (NAVs). Shares in the former sector are currently priced at an average of 21% below their NAV, while the latter offers an eye-stretching 34% discount.

Meanwhile, market-watchers may also have noted other signs of life in this deeply out-of-favour sector with the proposed merger of two big REITs, namely Tritax Big Box Ord (LSE:BBOX) and UK Commercial Property REIT Ord (LSE:UKCM). A spokesperson for the warehouse specialist BBOX claimed the deal would “bring together complementary logistics-oriented portfolios with a focus on resilient and growing income”.

If approved by shareholders, the merger would create Britain’s fourth-largest REIT, based on a stock market capitalisation of £3.9 billion with a property portfolio worth £6.3 billion. The new REIT’s size would leave it on the edge of entering the FTSE 100 index.

Less happily for your humble correspondent, the London Stock Exchange’s quarterly review of which companies’ market caps justify their inclusion in its indices is expected to see Tritax Eurobox booted out of the FTSE 250 index. A final decision will be announced after trading finishes tonight (29 February) but I can already see that shares I bought for 66p in December 2022, can be picked up for just 54p today. Ouch!

On a brighter note, EBOX should benefit from the long-term trend towards online shopping because its warehouses and local distribution hubs are needed to store all that stuff we buy online. It yields 8% dividend income, albeit without a five-year record of increases, and this comes through without any deduction of tax because I hold them in my ISA.

Another reason to look on the bright side is that it could have been even worse for me because the other Continental commercial property fund I nearly bought into at the same time was Schroder European Real Estate Inv Trust (LSE:SERE), which yields 9%.

Income is a priority for my ISA, as this 65-year-old knows the finishing post cannot be that far away, but I can also see this strategy doesn’t always work, having been hurt by several high-yielding value traps over the years. Even so, I am glad I opted for EBOX’s portfolio of edge-of-town warehouses rather than SERE’s glitzy shopping malls and office blocks, because my shares in the former have fallen by 11% over the last year, compared to the latter’s loss of 17%.

Looking forward, I believe the twin trends of working from home and online shopping mean the pain may just have begun for many investors in City centre skyscrapers or bricks and mortar retail. I say that without any glee because I had a lot of fun with friends at the office in the past and am sad to see high streets filling up with charity shops, which are replacing so many of the real ones.

But there is no point using my modest pension fund - or ISA - to try to resist mega-trend changes in the way we live and work. Returning to where we began, Segro started trading as Slough Estates Group more than a century ago and so it has survived several peaks and troughs in the property cycle.

More recently, the former Poet Laureate John Betjeman was uncharacteristically snide when he quipped in 1937: “Come friendly bombs and fall on Slough! It isn't fit for humans now” before later admitting that he regretted writing the line. Here and now, investors might reflect that if the seasoned team at Segro are pulling on their buying boots, perhaps bargain-hunters should consider following suit.

Ian Cowie is a freelance contributor and not a direct employee of interactive investor.

Ian Cowie is a shareholder in Tritax Eurobox (EBOX) as part of a globally diversified portfolio of investment trusts and other shares.

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

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