Richard Warne, Senior Portfolio Manager, Copia Capital
It is fair to say, over the last few years, the UK stock market has not been seen as that attractive or compelling for numerous reasons. But recently, we have seen a very definite uptick in interest in UK property assets. Amid external and geopolitical factors leading to significant turbulence in the investment and equity space, investors are increasingly considering cash, annuity and bond options. It is worth considering why current conditions are ripe for commercial property investment as a good potential alternative for portfolio growth.
Similar to small-cap UK equities, UK real estate investment trusts (REITs) have been consigned to the doldrums over the past few years, largely due to elevated inflationary pressures and the high-interest rate environment, which made them an unattractive proposition.
To maintain their tax-advantaged status, REITs are required to distribute at least 90% of their profits as dividends, leaving limited retained earnings to fund growth. As a result, they rely heavily on debt to finance acquisitions and expansion, making them particularly vulnerable to rising borrowing costs. At the same time, rising prices can push up maintenance and operating expenses, and rental income may not always keep pace. With inflation now easing and the Bank of England beginning to cut rates, we believe the backdrop for REITs has materially improved, offering compelling reasons to revisit the sector.
Firstly, valuations on UK REITs are low. This, coupled with the fact that many of the REITs on the London stock exchange are trading at a discount, has led to increased interest from knowledgeable and cash-rich private equity investors. There has been a flurry of bids and purchases of UK property and infrastructure recently.
So far in 2025, we have seen eight bids, compared to just five between October 2020 and the end of 2024. For example, in March, Norges Bank, one of the largest wealth managers in the world, took a 25% stake in Shaftesbury REIT, which invests in prime London real estate. Additionally, a US private equity consortium made a £1.61bn cash offer for Assura, a healthcare property investor and developer.
Specialist healthcare REITs like Assura and Primary Health Properties represent a particularly interesting niche within the market. By providing property for the NHS as well as health infrastructure in Ireland, they benefit from long-term leases and steady and predictable income streams. This combination of stability and income visibility is attracting investor interest – the Assura bid represented a 32% premium to its share price.
Institutional interest in UK real estate has partly stemmed from easing inflation, unlocking serious revenue potential from these assets. We are now seeing yields delivered in the 6% to double-digit range from a very low base, offering attractive cash flow relative to other asset classes.
Given recent instability in the stock market, many investors have turned to income-producing assets like annuities and bonds. However, the combination of cheap valuation and robust cash flows makes UK commercial property a serious contender among alternative income strategies. Given the nature of the infrastructure, these are assets that can be held for many years, they can generate consistent cash generation from a competitively priced entry point.
This is an area of the market that we currently feel genuinely excited about. With improving fundamentals and strong income potential, UK REITs represent a compelling opportunity for delivering diversified long-term income. Over the last few weeks, we have begun recommending adding some exposure to selected custom mandates to strike while the iron is hot.
This article is intended for regulated financial advisers and investment professionals only. Copia does not provide financial advice. This information is not intended as financial advice and should not be interpreted as such.
21st May 2025
Are UK REITs right for revival?
Richard Warne, Senior Portfolio Manager, Copia Capital
It is fair to say, over the last few years, the UK stock market has not been seen as that attractive or compelling for numerous reasons. But recently, we have seen a very definite uptick in interest in UK property assets. Amid external and geopolitical factors leading to significant turbulence in the investment and equity space, investors are increasingly considering cash, annuity and bond options. It is worth considering why current conditions are ripe for commercial property investment as a good potential alternative for portfolio growth.
Similar to small-cap UK equities, UK real estate investment trusts (REITs) have been consigned to the doldrums over the past few years, largely due to elevated inflationary pressures and the high-interest rate environment, which made them an unattractive proposition.
To maintain their tax-advantaged status, REITs are required to distribute at least 90% of their profits as dividends, leaving limited retained earnings to fund growth. As a result, they rely heavily on debt to finance acquisitions and expansion, making them particularly vulnerable to rising borrowing costs. At the same time, rising prices can push up maintenance and operating expenses, and rental income may not always keep pace. With inflation now easing and the Bank of England beginning to cut rates, we believe the backdrop for REITs has materially improved, offering compelling reasons to revisit the sector.
Firstly, valuations on UK REITs are low. This, coupled with the fact that many of the REITs on the London stock exchange are trading at a discount, has led to increased interest from knowledgeable and cash-rich private equity investors. There has been a flurry of bids and purchases of UK property and infrastructure recently.
So far in 2025, we have seen eight bids, compared to just five between October 2020 and the end of 2024. For example, in March, Norges Bank, one of the largest wealth managers in the world, took a 25% stake in Shaftesbury REIT, which invests in prime London real estate. Additionally, a US private equity consortium made a £1.61bn cash offer for Assura, a healthcare property investor and developer.
Specialist healthcare REITs like Assura and Primary Health Properties represent a particularly interesting niche within the market. By providing property for the NHS as well as health infrastructure in Ireland, they benefit from long-term leases and steady and predictable income streams. This combination of stability and income visibility is attracting investor interest – the Assura bid represented a 32% premium to its share price.
Institutional interest in UK real estate has partly stemmed from easing inflation, unlocking serious revenue potential from these assets. We are now seeing yields delivered in the 6% to double-digit range from a very low base, offering attractive cash flow relative to other asset classes.
Given recent instability in the stock market, many investors have turned to income-producing assets like annuities and bonds. However, the combination of cheap valuation and robust cash flows makes UK commercial property a serious contender among alternative income strategies. Given the nature of the infrastructure, these are assets that can be held for many years, they can generate consistent cash generation from a competitively priced entry point.
This is an area of the market that we currently feel genuinely excited about. With improving fundamentals and strong income potential, UK REITs represent a compelling opportunity for delivering diversified long-term income. Over the last few weeks, we have begun recommending adding some exposure to selected custom mandates to strike while the iron is hot.
This article is intended for regulated financial advisers and investment professionals only. Copia does not provide financial advice. This information is not intended as financial advice and should not be interpreted as such.