FTSE 350: Rising rates won't lift all Reit boats

Each aims to source and then lease commercial properties with a good prospect of long-term capital and rental growth. In most cases, this can be done with relatively small teams, although some players – such as property developers British Land (BLND) and Land Securities (LAND) – employ hundreds of staff to conceive, plan, and manage complex, multi-year projects.

More than most sectors, this business model invites extra scrutiny of firms’ capital structure, and the way managers balance asset values and tenant demand against the need to service creditors and turn a profit for equity investors. In keeping with most sectors, however, Reits’ cost of capital is rising as inflation and interest rates push up investors’ expected returns.

Taken in isolation, rising rates aren’t a disaster for property owners. They imply economic growth, and with it, tenants’ ability to absorb higher rents. Gearing for most sector constituents also remains modest, at least when compared to the years before the financial crisis. But each Reit’s navigation of the macroeconomic backdrop is largely determined by its property niche or style.

Take Assura (AGR) and Primary Health Properties (PHP), whose large portfolios of GP surgeries and NHS facilities are backed by long-term leases that are ultimately guaranteed by government funding and underpinned by the ever-present demand for community healthcare facilities.

Such dependability is always a plus, especially when inflation and borrowing costs are negligible. Now that those are rising, near-term prospects look more chequered. Less than half of the duo’s leases are fully indexed to rises in the cost of living, meaning inflation is likely to exceed rent increases and real income growth. By contrast, owners of logistics and self-storage assets – where customer demand is high – look well placed to carry on lifting rents ahead of inflation.