19th Jan 2024 10:37
(Alliance News) - UK real estate investment trusts will enjoy a decent 2024, Shore Capital Markets predicted, though the broker noted that this week's hotter-than-expected inflation reading suggests that there may still be "bumps on the road" for the sector.
This year could also be a big one for deal making, evidenced by LondonMetric Property PLC once again turning to M&A.
Shore said: "2024 has started with a bang for UK REITs, with LondonMetric's proposed acquisition of LXi REIT and the latest CPI data serving as a reminder of potential bumps in the road during the expected normalisation of interest rates. That said, we continue to uphold our cautiously optimistic outlook for 2024."
The broker noted that 2023 ended with markets optimistic that interest rates have peaked. It meant some property stocks enjoyed a "santa rally". Among them was Land Securities Group PLC, which surged 13% in December. Peer British Land Co PLC rose 14% last month, while Urban Logistics REIT PLC added around 10%.
Data earlier this week was a "timely reminder" that an acceleration in inflation is still possible, which could give the Bank of England some more work to do before interest rate cuts are possible.
Numbers on Wednesday showed UK consumer price growth unexpectedly heated up in December. The Office for National Statistics said the consumer price index rose by 4.0% annually in December, the pace of inflation notching up from a 3.9% increase in November. The reading came in hotter than market expectations, with consensus having been for price inflation to cool to 3.8%, according to FXstreet.
"We continue to believe that the [Bank of England's Monetary Policy Committee], scarred by its recent track record, will make one cut to base rates in the first half of 2024 and maybe two-to-three in H2, so bringing UK base rates within the 4.25%-4.75% range," Shore analysts said.
Although Wednesday's data dented some rate cut bets, Threadneedle Street is expected to enact its first cut of the cycle in May. The benchmark bank rate currently stands at 5.25%, after 515 basis points worth of hikes since December 2021.
Shore also believes 2024 could be a big one for deal-making opportunities in the UK real estate, after "consolidator in chief" LondonMetric lit the blue touch paper earlier in January.
Fresh from bolstering its portfolio with the buy of CT Property Trust, LondonMetric sized up an LXi REIT PLC tie-up.
The merger will see LondonMetric takeover LXi REIT, whose shareholders will receive 0.55 of a new LondonMetric share for each LXi REIT share that they own. LondonMetric shareholders will own 54% of the enlarged company and LXi holders the remaining 46%. It will create the UK's fourth-largest real estate investment trust.
Shore analysts added: "Furthermore, with around GBP50 billion of commercial UK real estate due to be refinanced in 2024, and a sizeable proportion of it likely distressed, we believe the wider sector is likely to benefit from plentiful deal opportunities."
All-in-all, the broker has cautious optimism for REITs this year, with the industrial and logistics firms its preferred play.
"Our key recommendations here include Segro PLC, Tritax Big Box REIT PLC and LondonMetric. We also believe NewRiver REIT PLC looks well placed given improving rents, stabilising asset valuations, a strong balance sheet and the potential to do opportunistic deals," Shore added.
NewRiver is focused on retail and leisure, and its portfolio includes assets operated by the likes of Marks & Spencer Group PLC and Next PLC.
By Eric Cunha, Alliance News news editor
Comments and questions to [email protected]
Copyright 2024 Alliance News Ltd. All Rights Reserved.
Related Shares:
LondonMetricLand SecuritiesBritish LandUrban LogisticsLXI.LTritax Big BoxNewRiverMarks & SpencerNext