By Matthew Norris, head of real estate securities at Gravis and manager of the TM Gravis UK Listed Property Strategy
For some time now, listed property companies have traded at large discounts to the value of their underlying assets.
Private equity firms and rival REITs spotted the opportunity and the past 12 months have been dominated by a wave of bids, mergers and takeover activity in the UK REIT sector.
For many shareholders, the immediate reaction to a bid is simple: the share price rises and a premium is offered. Job done.
But investing is rarely that straightforward. When a REIT receives a takeover approach, shareholders are not simply being asked whether they like the offer price. They are being asked whether they are prepared to sell their ownership of a portfolio of assets, future income streams and potential upside.
That is why shareholder action matters. In a scheme of arrangement, shareholders vote. In a contractual takeover offer, they decide whether or not to accept the offer for their shares. The mechanism may differ, but the principle is the same: shareholders are being asked to make an ownership decision.
All shareholders can influence outcomes
Too often, retail investors assume the outcome will be decided by large institutions. They receive the circular, glance at the recommendation and conclude that their decision will make little difference.
That is a mistake. Shareholder engagement can influence outcomes, shape negotiations and improve terms. Whether through a vote, an acceptance or a rejection, shareholder action can matter.
Who benefits from an M&A deal?
The simple question investors should ask is this: who benefits most from the deal?
If a buyer is looking to acquire a REIT it is worth understanding why.
Acquirers do not pursue transactions out of generosity. They do so because they believe value can be created. That value may come from future rental growth, operational efficiencies, lower debt costs or the ability to acquire assets more cheaply through the stock market than in the direct property market.
There is nothing wrong with that. The question for shareholders is not whether the buyer has identified an opportunity. It is whether the terms fairly reflect the value of the assets, income streams and future upside they are being asked to give up.
Recent transactions have highlighted exactly this issue. When private equity and strategic buyers have targeted UK REITs, Gravis has consistently asked whether shareholders are receiving compensation not just for the properties, but also for the operating platforms, brands and years of value creation embedded within these businesses.
As I have argued previously, companies such as Big Yellow Group PLC (LSE:BYG) have spent decades building market-leading positions. In any takeover situation, the question for shareholders is whether the price reflects merely the assets, or also the strategic value and future growth opportunities those platforms represent.
A current example is the proposed acquisition of Picton Property Income (LSE:PCTN). While the headline terms offer shareholders a premium to the prevailing share price, I argue investors should look beyond the headline number.
Picton's board have spent much of the past year buying back shares because it believed the market undervalued the company's assets. The question for shareholders is whether the proposed terms fairly reflect the value of those assets and whether enough of the future upside is being retained by existing owners rather than transferred to the acquirers. That is precisely the sort of analysis shareholders should undertake whenever a bid emerges.
The difference between price, value and worth
A premium to yesterday's share price does not automatically mean shareholders are receiving full value. Because price, value and worth are not the same thing.
Price is observable. It is what flashes on the screen.
Value is more fundamental. It can be assessed by reference to assets, cash flows, rents, costs, leverage and required returns. For REITs, reported net asset value is an important reference point, but it is not the whole answer.
Worth is different again. It is what a motivated buyer may be prepared to pay when a business is worth more to them than it is to the market. That may reflect a control premium, merger synergies, lower financing costs, stamp-duty advantages or the strategic value of combining platforms.
That distinction has become increasingly important as more REIT boards have recommended transactions at discounts to reported net asset value.
Industrials REIT in 2023 and Lok'nStore Group in 2024 are useful examples. In both cases, boards secured terms that looked beyond the prevailing share price and reflected the strategic value of the business to a motivated buyer. They demonstrate that well-positioned businesses can command outcomes closer to true worth when boards are prepared to negotiate from a position of conviction.
In some cases, boards argue that the certainty of a deal outweighs the potential value that might be realised over time. Investors may agree with that conclusion. Equally, they may not. Either way, shareholders deserve enough information to make their own judgement.
Transparency is key
That brings us to disclosure. When a board recommends a takeover, shareholders are entitled to understand the assumptions behind that recommendation.
In medicine, informed consent requires patients to understand the risks, alternatives and consequences of a decision. Investing should not demand a lower standard. The more information shareholders receive, the better equipped they are to decide whether a deal genuinely serves their interests.
When shareholders are asked to approve a major corporate transaction, they should be given enough information to understand the valuation methodologies, key assumptions and relevant comparables underpinning any “fair and reasonable” opinion. Investors cannot make an informed decision if they are expected to rely on a board recommendation without understanding the basis on which that conclusion was reached.
That scrutiny matters whether the consideration is cash or shares. In a cash bid, shareholders need to understand whether the price fairly reflects the true worth of the business they are being asked to sell. In a share-for-share transaction, they also need to assess the value of the paper they are receiving. They are not simply exiting for cash; they are exchanging their interest in one company for shares in another and continuing to participate in the future performance, risks and opportunities of the enlarged business.
The challenge is that not all paper deals are created equal. Exchange ratios matter. Valuations matter. The proportion of future upside retained by existing shareholders matters.
Investors should understand what they are receiving in return for the assets they are giving up.
M&A set to continue
Looking ahead, M&A is likely to remain a major feature of the REIT sector. The large discounts that existed across much of the market have narrowed, but opportunities still exist.
The next phase may involve more mergers between listed companies rather than straightforward take-private transactions. Larger companies can often benefit from greater scale, improved liquidity and lower costs.
But strategic logic alone is not enough. Successful transactions depend on shareholder support and that support should never be automatic.
Getting the best out of a deal
The best deals are those where shareholders understand the rationale, are given enough relevant information and can see that the benefits are being shared fairly.
Whether the proposal is a scheme of arrangement, a contractual takeover offer or a major asset sale, the principle is the same. Shareholders are being asked to make an ownership decision. They should approach that decision as owners of the business, not passive recipients of a board recommendation.
The UK REIT sector appears to be in a period of consolidation. The opportunities are real, but so are the choices. Shareholders should not simply ask whether a bid offers a premium to the prevailing share price. They should ask whether it offers fair value, whether the upside is being shared fairly, and whether the terms properly reflect the true worth of the business they already own. Then they should act accordingly.
This is a marketing document. No information contained in this article should be construed as providing financial, investment or other professional advice and should not be considered as a recommendation, invitation, or inducement to subscribe for, dispose of or purchase any such securities. While we may discuss certain sectors and/or securities or investments, we do not know whether they are suitable for you as an individual. If you are unsure about an investment, please seek professional advice. Investments can both rise and fall in value. Past performance is not a guide to future performance.