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FTSE 350: Real estate bets on the Reit horse

The Reit-ification of this property subgroup highlights the structure's significant tax benefits
April 28, 2022

‘Real estate’ is a somewhat arbitrary subgroup within London’s listed property sector. The main thing that separates companies like Grainger (GRI), Sirius Real Estate (SRE) or CLS (CLI) from their property-focused peers is that they aren’t structured as real estate investment trusts (Reits), owing to either the asset allocation or geographical focus of their portfolios.

That distinction is increasingly irrelevant. Office landlord CLS, which has about half of its properties in France and Germany, converted its UK operations to a Reit on 1 January. Three months later German business park specialist Sirius did the same for its newly acquired UK arm BizSpace. In time, residential landlord Grainger also plans to make the change, once 75 per cent of its gross assets and accounting profits relate to property rental business.

There are distinct tax benefits to Reit status. In practice, the structure mandates firms to distribute at least 90 per cent of taxable income profits to shareholders, while exempting them from paying tax on income and gains from their assets. That stops rental income being double taxed – or indeed taxed at all if Reit shares are held in an Isa. No wonder the arrangement is so popular.

Rounding out this odd lot is Savills (SVS), the one listed estate agent in the FTSE 350. Its business model is closer to that of a professional services firm, although its fees closely mirror global lettings and property transactions. This could cool this year if inflation and interest rates continue to climb.

The same could be said of all businesses in the group. But while property tends to be a useful hedge to price rises, it is underlying asset demand – be it from office workers, renters, German manufacturers, last mile delivery firms, or oligarchs – which will likely prove the greater factor for returns. Unless the combination of inflation and tighter credit sparks a recession, that is.

 

NAMEPrice (p)Market cap (£mn)12-month (%)Fwd PEYield (%)Last IC View
CLS208845-10.0%174.4Hold, 201p, 16 Mar 2022
Grainger2962,1948.0%341.9Buy, 313p, 19 Nov 2021
Savills1,1061,595-5.0%133.1Hold, 1,165p, 10 Mar 2022
Sirius Real Estate Limited1201,40923.0%172.9Buy, 133.5p, 8 Nov 2021
Source: FactSet