Expect more real estate investment trust mergers as the age of the ‘big box behemoth’ dawns

There is been a surge in mergers in the real estate investment trust (REIT) sector over the past year, and the volume of mergers has accelerated within the past month, but what’s driving the sudden rush to consolidate?

Three REIT mergers have all been agreed upon within the last month: Tritax Big Box and UK Commercial Property, Custodian Property and Abrdn Property, and LXi and Londonmetric.

Last year, CT Property was acquired by Londonmetric and Ediston Property Investment Company agreed to sell its entire portfolio to the US real estate giant Realty Income.

Oli Creasey, property analyst at Quilter Cheviot, noted that the Tritax and LXi mergers from this year “had a few notable commonalities,” such as the ultimate size of the combined entity. Both will see their market caps settle at over £3.5bn when the deals are completed, putting them on the cusp of entering FTSE 100.

However, the phenomenon isn’t unique to REITs. The investment trust sector has seen mergers erupt throughout, with 2023 being dubbed the ‘year of the investment trust merger‘.

Just last month, JP Morgan moved to merge two of their trusts, its Multi-Asset Growth & Income Trust and Global Growth & Income Trust, citing their size and the benefits that increased liquidity and reduced admin costs bring.

Meanwhile, Abrdn has been on a merger spree with its trusts, with Fidelity’s China Special Situations trust set to absorb Abrdn’s China Investment Company, Abrdn Smaller Companies Income merging into its Shires Income trust and the firm’s Asia Dragon trust absorbing the Abrdn New Dawn trust.

Indeed, Darius McDermott, managing director of Chelsea Financial Services, argued that this wasn’t necessarily about REITs, but was “an investment trust issue” as the sector has suffered continued discounts and shrinking size.

Liquidity was also a huge factor for these trusts, and McDermott re-emphasised that “we’re not just seen this in REITs.”

Ben Yearsley, director of Fairview Investing, agreed, adding that the “simple answer is that bigger is better.”

“There have been and are too many sub-scale trusts (not just in the REIT sector by the way), and with all the M&A going on in the wealth space, trusts need to be bigger for liquidity and concentration reasons,” said Yearsley.

“Just look at the list of trusts and per cent owned by the recent Rathbones and Investec merger – Too much concentration in one firm means they can’t sell and others won’t buy.”

Following the merger of Rathbones and Investec W&I last year, the firm declared it owned more than five per cent of the shares in 28 investment trusts, and held over 20 per cent of the shares in five trusts.

Rathbones said it owned over 30 per cent of BH Macro, raising serious concerns around liquidity.

However, other analysts noted certain factors that were pushing REITs specifically towards mergers.

Keith Dowley, co-founder of property adviser DTRE, said: “We’re beginning to see aggregation on an unprecedented scale” as the M&A ramps up, moving us into “the age of the big box behemoth.”

“This merger activity avoids the friction associated with aggregation on a piecemeal basis,” added Dowley.

“It could be the start of similar activity amongst some of the specialist listed players.”

As REITs are managing physical assets, consolidation may see more savings than in other investment trusts, especially due to their small team size meaning costs can be minimal.

In addition, diversification is far harder to pursue when owning entire properties than simply stocks.

McDermott also noted that Abrdn, the manager of UK Commercial Property, actually had purchased a 60 per cent stake in Tritax Big Box in 2020, making the specific acquisition make a lot more sense.

Charles Ferguson Davie, CIO at UK real estate fund manager Moorfield Group, added that REIT’s persistent discounts “have made listed real estate fertile ground for M&A activity.”

Ferguson Davie noted that “the bulk of activity is taking place in the two sectors marked by favourable demand-supply dynamics”, namely residential and warehousing.

“Expect to see more activity – in both the listed and unlisted space – in both sectors, as investors are drawn to areas of the real estate market underpinned by structural growth drivers,” he added.

Quilter’s Creasey added that REITs had actually performed “very strongly” in the last quarter of 2023, “and are no longer as cheap as they were”, and their property values could also be buoyed by future rate cuts.

“We still like the sector for its income generation, but have moderated our stance following the almost 30 per cent return from UK REITs in the run-up to Christmas 2023,” he concluded.