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June 8, 2020

Valuations and clarity in real estate

This article, written by Roger Clarke, originally appeared in the Chartered Institute for Securities and Investments Journal on 8 June 2020. 

June quarter day will likely by a sobering one this year. In real estate, recent trading updates from some of the largest listed landlords confirmed fears that tenants – especially in retail – are struggling to pay rent and that Q2 will likely be even more of a struggle. It comes as no surprise that shares in Landsec and British Land, two of the largest diversified landlords in the UK, are down 36% and 34% respectively from the beginning of the year at the time of writing.

However sobering the sentiment is, recent activity reveals the value of greater transparency and certainty in real estate – and a need for a platform that enables it. In April, amid a wide downturn in the sector, three FTSE 250 property companies raised more than £400m between them. All three either met their target or exceeded it. How did they manage to do that while others floundered? They had certainty.

All three real estate investment trusts (REITs) – Supermarket Income REIT, Big Yellow Group and Assura – have portfolios specialising in a particular sector, respectively supermarkets, self-storage and primary care medical centres. Investors have a clear understanding of the risks and opportunities in each of those sectors. For Supermarket Income REIT and Assura, in particular, their tenants have been at the forefront of meeting demand brought on by the pandemic. Raising extra capital, then, for their development pipelines is a strong proposition, especially when their tenants are typically on long secure leases.
Stock market performance confirms this. Although there were losses across the board in March, REITs, like the three I mentioned, have bounced back. Investors have more faith in the strength of long leases with covenants backed by essential businesses or, in the case of Assura, the government itself. REITs that specialise in those types of leases have the most to gain, in contrast to large, diversified portfolios, which have income streams of varying – and potentially unclear – quality. 

The question is: can we make the market value of property assets even clearer to investors? We believe we can. When an individual asset is listed on the International Property Securities Exchange (IPSX), investors will have the best possible understanding of the income it generates. A building might have a mix of short and long leases with occupiers ranging from multinational corporates to independent retailers. Not every lease will necessarily be secure, but the point is you have that information at your fingertips and can form your own view. 

Values will inevitably rise and fall in times of heightened volatility, and that’s often out of our control, whether we are fund managers, heads of listed firms or investors. The challenge is to meet that volatility with as much clarity on asset values as possible. It won’t solve a macro crisis, but it will give investors the best possible opportunity to make wise, informed decisions.
As we all continue to navigate these extraordinary times, clarity is more valuable than ever – let’s not forget that when a sense of normality returns.