Most of the UK’s largest property funds and REITs have a majority of their assets exposed to the retail and office sectors of the property market. The retail property market has been struggling for some years now as the move to online shopping contributing more of the overall share has hit bricks and mortar retailers.
The office market was going some way towards picking up the slack, with rents in London especially booming and new Class A City office towers filling up in advance of completion. However, the Covid-19 pandemic has cast a dark cloud over future demand for office space. It’s still early to say just how prevalent work from home will continue to be one the immediate coronavirus crisis passes but investors are understandably cautious.
The combined impact of the pre-pandemic trend of a slumping retail property market and post-pandemic acceleration, along with doubts over office demand, has devastated the share prices of commercial property funds. Most currently trade at a significant discount to their theoretical net asset value.
That is seeing international funds move in to snap up significant stakes in British property funds, clearly confident that they have been oversold. The latest example is Canadian investment group Brookfield Asset Management paying £260 million for a 7.3% stake in British Land – one of the UK’s biggest property funds.
At the time the investment in British Land was made several days ago, the company’s share price was trading at a huge 57% discount to net asset value. Even if that net asset value is only a paper value and not necessarily what the real market would pay for assets if the fund moved to sell them, it is safe to say the extent of the discount left plenty of margin for error. Brookfield certainly seem confident and the move could see the company, which controls over $515 billion of assets, mount a future takeover bid. It is already a major landowner in central London, having, in partnership with the Qatar Investment Authority, acquired Canary Wharf owner Songbird Estates for £2.6 billion in 2015.
Brookfield has maintained a bullish position on London since the 2016 Brexit referendum and is convinced the UK’s capital is set to retain its position as Europe’s centre of commerce. Last year the company build a 37-storey office tower in the City of London and is currently in talks to buy another £1.2 billion of London office building.
Since the March sell-off Brookfield has retrained its focus on acquiring stakes in publicly-listed companies, which it sees as representing value due to depressed share prices. This month Brookfield said that it had “built up toehold positions in a number of companies that we feel, like ours, have been significantly undervalued in the current market environment”.
A source who has worked closely with Brookfield told The Times:
“They don’t like being minority shareholders in anything. They are control freaks so I can’t imagine they bought that stake just for the sake of it.”
The British Land share price has gained over 12.5% this week, with other investors presumably encouraged by both Brookfield’s faith in the UK’s commercial property market as well as the prospect of a future takeover attempt.
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