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Shareholders are often told to “be greedy when others are afraid, and afraid when others are greedy,” as veteran fund manager Warren Buffett puts it.
But in the current climate, it’s wise to weigh the arguments before buying stocks that are said to be “oversold” and thus temptingly cheap.
Take for example Reits – real estate investment funds – such as British Land, Land Securities, Segro and Tritax Big Box. These groups own offices, stores, logistics warehouses that serve e-commerce, and data centers that power the internet.
Reits shares have fallen on higher interest rates and the effects of the mini-budget. The prices of some are well below their intrinsic value, with logistics Reits particularly hard hit.
But predictions that the commercial real estate slump is nearing its end make Reits more attractive.
Jennet Siebrits, head of UK Research at the CBRE consultancy, claims that ‘green shoots of recovery will emerge’.
Matthew Saperia and James Carswell of broker Peel Hunt agree, saying: “We are optimistic that the bottom is near.” As a result, they upgraded British Land, Land Securities and ten other Reits to a buy, including Workspace and Lok’n Store, the storage group.
But Goldman Sachs predicts commercial property values will fall 15-20 percent by the end of 2024 – and nerves are upset by the controversy over Home Reit, which specializes in social housing.
James Yardley of Chelsea Financial Services argues that it is risky to conclude that the share price declines are exaggerated given that Reits are at the mercy of so many macro forces. “Some may not be as cheap as they seem,” he says.
Recent statements from some Reit executives underline this uncertainty. Brian Bickell, of Shaftesbury – the main landlord in Covent Garden and Soho – said bars and shops were busy over Christmas but rail strikes are now a threat.
Andrew Coombs, boss of Sirius Real Estate – which operates business parks in Britain and Europe – warns that ‘inflation in the UK will be harder for longer than in Europe’.
Meanwhile, due to the lockdown, employees have higher expectations of office quality if they want to be seduced by WFH.
In 2023, a workplace must be sustainable, with facilities such as roof terraces and in-house baristas. Like me, listen to conversations between estate agents and clients viewing properties in the West End and you’ll hear a litany of features that need to be upgraded or redesigned to lure renters.
There are potential buyers, but as one insider says, “There are such difficulties with financing that they sit back.”
Against this background, some real estate funds are trying to relieve office and shopping centers – necessary because of their ‘open-ended’ structure, which requires them to raise cash if investors want to buy back their holdings.
And some funds block such redemptions. Investors considering Reits can be reassured by the closed-ended structure of these real estate vehicles, which puts them under no pressure to sell assets when investors sell stocks.
These fire sales present opportunities for Reit executives.
Laura Elkin, manager of AEW, says: “We identify assets with robust occupational demand that are mispriced relative to long-term fundamentals.” But ‘the uncertain professional perspective’ means she avoids offices. The dividend yield on AEW is 7.5 percent. Decent returns are one of the reasons Reits win over fans.
Shore Capital’s Ben Yearsley says he’s “nibbling” Reit shares while acknowledging that dividends are likely to be cut.
By law, a Reit must pay out 90 percent of its taxable profits in dividends each year. But in some cases, these payouts are not fully covered by earnings and may be reduced.
I’ve resolved to be a more daring investor in 2023, which means I’m considering a little adventure in the land of Reit.
Numis recommends the LXi Reit and Industrials Reit for their management. I am also considering Land Securities, a FTSE 100 company with 24 sqm of office, retail and other space. His portfolio includes the Piccadilly Lights – the big screens in central London.
The answer to the WFH doctrine is office buildings like the Capital Forge, with all the new necessities. I hope the managers ‘work’ this – and the other assets.
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