REIT earnings season is kicking off next week with retail and commercial property big-caps British Land reporting its interim on Monday, November 13, followed by FTSE 100 peer Land Securities, on Tuesday.
Stakeholders will be eager to find evidence of an inflection point for the property sector following a disappointing year to date.
According to the MSCI monthly index, overall property values have fallen around 1.9% in the reporting period, driven by an 8.9% decline in office values and a 2.0% decline in retail values.
Research conducted by Cushman & Wakefield and reported in the Evening Standard implied that Central London lettings, where British Land and LandSec have significant exposure through campuses, would be around 8.5m sq ft in 2023m which is in line with 2021 but miles below pre-pandemic levels.
C&W said this is the ‘new normal' for office space in a work-from-home environment and perhaps helps explain the huge discount to stated assets British Land and Land Securities currently shoulder.
Both have large office portfolios and have made these a key plank of their recovery post the pandemic.
Land Securities is sitting currently at around a 37% discount to its last stated net assets, while British Land is even worse at around 47%.
They are not alone. According to one broker, the entire UK REITs sector is sitting at discounts of anywhere between 20% and 55% to forecast net asset values.
In its view, either analysts are being way too optimistic in their forecasting of net tangible assets (NTA), or the stock market is being overly pessimistic.
Unsurprisingly, the broker suggests it’s the latter particularly given that "there is plenty of real-world evidence of true asset values via the number of observable transactions taking place".
And, with investors seemingly throwing in the property towel, perhaps it will have to be the companies themselves that get things moving again.
Mid-caps Pickton and UK Commercial this week started merger talks and more might be on the way.
“It certainly won’t be the last either in our view, as investors begin to look at alternative ways to extract value from a challenged UK stock market," added the broker.
Who knows? Maybe British Land and Land Securities might tie the knot someday.
Perhaps that's too far-fetched but next week watch for lettings take-up, voids, and whether both giants remain committed to expansion.
Any slippage on these and the pressure will mount further.