Equity analysts covering London-listed real estate expect the recent wave of take-private deals to continue as buyers see an opportunity to pick up and progress assets at a knockdown price, while investors look to cash out given the yawning discounts at which some stocks trade.
At Berenberg, research analyst Kieran Lee anticipates takeovers of companies trading at discounts to long-run averages – “due to the pandemic or otherwise” – as well as those in markets with strong long-term prospects and in which debt financing is available, which he said underpins recent purchases of RDI REIT and Urban&Civic.
Lee highlights the London office sector as a likely source of future deals, with Helical and Great Portland Estates possible targets. He also points to Capital & Regional and Empiric Student Property as potential take-privates.
Such deals are “increasingly on investors’ minds”, says Robbie Duncan, director for real estate research at Numis.
“Ultimately, I think the listed REIT sector will de-equitise over the next year or two, led by companies where investors cannot get comfortable with management’s ability to deliver an attractive total return in a meaningful time frame,” Duncan adds. “If that’s the only way to manufacture a closing of discounts, then investors will vote with their wallets.”
The challenge, Duncan says, will be future liquidity for purchasers. “What is their exit, and how do you underwrite future valuations for certain property sectors in the current climate, where the ratio of structural to temporary disruption is not always obvious?” he says. “The majority of private equity investors are IRR focused, which means they need broad visibility on an exit.”
Peel Hunt real estate analyst Matthew Saperia sees cyclical and structural issues driving transactions.
“There is clearly a mismatch in pricing between the public and private markets – some of that is warranted, some of it isn’t,” he says. “The public market probably tends to be a little more short-sighted than the private market, so other capital pools will be willing to look beyond the next two years and understand either value or demand for real estate that the equity market might be concerned about in the short term.”
Saperia adds: “There’s also a structural issue at play, particularly around REITs themselves, around scale and liquidity… the vulnerable companies tend to be sub-scale, with illiquid shares. Investors tend to shun them, which is why the discount tends to be large. The reason an equity investor wouldn’t look at a company is manna from heaven for a private equity business, because they don’t care about share liquidity. That’s their opportunity to take advantage of it.”
And with the timescale for exit likely some way away, many takeover targets may find that a private buyer unlocks the value in pipelines of projects that shorter-term equity investors might not have the timescale for.
“What will happen under a new owner is they’ll provide the growth capital that the equity market just wasn’t willing to provide for that business,” Saperia says. “Wembley Park would never look like it does today if Quintain remained in a PLC wrapper. Lone Star just said ‘there’s the cheque book, go out and build it’.”
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