FTSE 350 Review: Not so sweet sixteen for Reits

Commercial real estate faces the prospect of higher interest rates both pushing down values and straining would-be buyers’ budgets. Commercial assets also face stagnating rents and increasing vacancy rates, as the forthcoming recession means many tenants will struggle to make rent payments and others will go bust. Last year, corporate insolvencies were 76 per cent higher than in 2019, before the pandemic, thanks to a combination of rising business costs, the end of Covid business support and higher interest rates. The picture looks unlikely to improve any time soon, so Reit investors should be aware of the potential hit to rental income this year.

Some miseries, however, are unique to certain subsectors. For office Reits, office demand may end up being permanently lower than pre-Covid. For retail Reits, online shopping may continue to hurt physical retailers. And for warehouse Reits, the fallout from the end of the warehousing boom suggests even popular sectors could struggle. On the plus side, valuations across the sector have already priced in a lot of pain, meaning yields will be enticing for many investors. 

There is some relative good news for those real estate companies who have Reit status for the UK arm of their business but also own assets in Europe, such as Sirius Real Estate (SRE) and CLS Holdings (CLI). A survey by real estate investor association INREV found that investors were more bullish about Germany and the Netherlands than the UK, while the pace of deal growth on the continent outstripped that seen domestically in a number of major markets. Still, the INREV survey found that European real estate investors generally were more downbeat than North American and Asia Pacific investors: the pain of the downturn won’t be confined to these shores alone.

But some Reits are making entrepreneurial gambles in an attempt to turn their fortunes around. Shopping centre landlord Hammerson (HMSO) announced plans last month to turn a former John Lewis into office space, while British Land (BLND) is ploughing ahead with its plans to turn a 53-acre Canada Water site into a whole new neighbourhood complete with housing, event spaces, offices and shopping spaces. Time will tell if these bets pay off.