Investors interested in yield say that the shares of real estate investment trusts (REITs) tend to act somewhat like bonds.
This is great in normal times but can be problematic when interest rates rise - bonds suddenly start outcompeting bond-like stocks. At the same time, property vehicles find it harder to use debt-fuelled growth to drive their dividends.
Luckily, REIT managers have a lever to pull - executives can keep dividends growing when rates rise by building bigger platforms, stripping out duplicate costs and hunting for positive synergies.
Consolidation was a big theme for the largest European REIT deals of 2022. Secure Income REIT agreed to be acquired by LXi REIT [LON:LXI] in May in a deal designed to yield one of the lowest total expense ratios in the UK. Meanwhile, Brookfield [NYSE: BAM] vehicle RE Invest Belgium launched a takeover of Befimmo in February in a deal designed to unlock long-term value.
European REIT deal value hit EUR 12.4bn across 21 deals in 2022, the highest level since 2014, as both the Bank of England and the European Central Bank (ECB) ramped their baseline rates to fight inflation, according to Dealogic data.
Deal value had started climbing in 4Q21 as the macro scenario began to turn. The total deal value had hit a decade-long low in 2020, when the Bank of England and the ECB were keeping rates ultra-low in response to the first phase of COVID-19.
UK goes for gold
REITs date back to 1960 in the US, but these vehicles, which offer low taxes in return for high dividend payments to retail investors, came surprisingly late to Europe. Belgium led the way in the 1990s, but most of its neighbours only followed suit in the 21st century. The UK introduced REITS in 2006, followed by Spain in 2009.
The UK dominates the European market for M&A involving REITs, with six deals and a total value of EUR 6.1bn since the beginning of January 2022, according to Dealogic data. This is almost half of the total European deal value. First-mover Belgium gets the silver medal, while Spain comes in with bronze.
Lar, Lar Land
With interest rates continuing to soar, the consolidation of Europe’s REITs is likely to remain a theme, even though the numbers for 2023 are a little flat so far.
One Spanish situation to watch is Castellana Properties SOCIMI [BME:YCPS], a subsidiary of South Africa’s Vukile Property Fund [JSE:VKE]. It bought a 21.7% stake in rival REIT Lar España Real Estate [BME:LRE] in January 2022.
The stake deal could lead to a friendly tie-up between the two companies, Vukile CEO Laurence Rapp told this news service the same day. So far, no deal has been announced, but the rationale will only improve as interest rates rise.
Meawhile, a takeover of Excem SOCIMI [BME: YEXR] in Spain was halted last month after the bidder failed to present a bank guarantee, as reported. The small REIT has called an extraordinary general meeting (EGM) today (Monday) to discuss the partial or total divestment of its assets.
On the buyside, Befimmo was not the only consolidation deal involving Brookfield. The fund also bought Hibernia REIT in 2022. It could execute more deals as interest rates rise, helping drive total deal values higher.
