US Investors Eyeing UK Property Funds for 8% Yields Amidst Market Downturn

Major investment managers convened in San Francisco this week to discuss the undervalued state of British retail and other property assets, signaling potential opportunities for investors. Real Estate Investment Trusts (Reits), which encompass shopping malls, offices, and logistics facilities, are presenting particularly attractive bargains.

The share prices of these trusts have been impacted by concerns over rising interest rates and consumer confidence. However, they are currently offering yields exceeding 6 percent and appear poised to rebound.

Land Securities, a significant Reit with assets like the Liverpool One shopping center and Piccadilly Lights in London, recently increased its stake in the Bluewater shopping center and acquired Newcastle's Metrocentre. The latter acquisition, where Frasers Group was also a contender, is expected to yield 8 percent in rental income after costs.

Matt Norris, manager of the TM Gravis UK Listed Property fund, commented that Reit valuations, rather than the businesses themselves, are what appear "broken." He expressed surprise that UK institutions may not be recognizing this potential.

Earlier this year, U.S. industrial property giant Prologis acquired Segro, a data center Reit, for a 39 percent premium to its share price, marking the largest takeover in Britain this year. While future activity may not reach this scale, Reits remain on the radar for American investors.

Shifting Investment Strategies

Data from analytics group Caci indicates that a small percentage of prime retail locations account for a significant portion of consumer spending, highlighting a trend towards quality in the sector. Reits are focusing on these high-performing locations, where a scarcity of new developments is aiding their recovery.

Hammerson's acquisition of a 50 percent stake in Manchester's Arndale in July illustrates a comeback for the Reit since 2020. Retail parks are also drawing interest due to high occupancy rates, driven by convenience and services like click-and-collect, which benefit from e-commerce.

NewRiver Reit recently purchased The Springs retail park in Leeds for £74 million. This activity coincides with a broader resurgence in Reit takeovers. U.S. activist investor Ancora has urged self-storage specialist Big Yellow to consider a sale, valuing its shares significantly higher than its current market price, citing its London-centric portfolio as "scarce and irreplaceable."

Another U.S. activist, Irenic, has also called for Big Yellow to seek a buyer. In the logistics sector, Harworth was recently acquired by UK infrastructure group Peel. While the offer represented a 47 percent premium to Harworth's average share price, it was still at a 10 percent discount to the Reit's asset value.

Investment Avenues for Retail Reits

Investors interested in the undervalued UK retail sector have several options. Analysts at Goldman Sachs have issued 'buy' ratings for Land Securities and Hammerson. NewRiver's share price has risen nearly 16 percent this year, with analysts targeting further growth and a current yield of 8.7 percent.

Supermarket Income Reit offers a 7.7 percent yield, with plans to expand its portfolio of supermarket-backed properties. For exposure to logistics facilities serving online retailers, LondonMetric and Tritax Big Box are highlighted. LondonMetric, a favored stock among analysts, provides a 7.3 percent yield and is diversifying into hotels and leisure parks. The Reit, along with Schroder Real Estate, recently acquired Picton.

Tritax Big Box is also developing a data center near Heathrow. Shaftesbury Capital, focused on West End retail and restaurants, has 'buy' ratings with an average target price of 172p.

Diversified Reit Options

Beyond retail, British Land specializes in premium office spaces sought by U.S. tech firms. Goldman Sachs has set a target price of 500p for British Land shares.

For investors seeking a broader exposure, funds such as Gravis UK Listed Property or ETFs like iShares UK Property offer a diversified approach to the Reit market. While not all Reit investments may prove successful, the current yields are considered a notable compensation for potential risks.