How to invest in property and pick up an 8% income with these overlooked funds

British retail and other property assets are cheap. That was the message this week at a major finance conference in San Francisco, attended by the world’s top hedge fund and other investment managers.

It should serve as a loud alert to UK investors. More opportunistic bids could loom, and a reassessment of the low valuations could gather pace.

Some of the best bargains are said to be found among Real Estate Investment Trusts (Reits), which own shopping malls, offices and logistics warehouses and storage facilities.

Fears over the impact of higher interest rates and faltering consumer confidence have hit Reits’ shares. But these trusts offer yields of 6 per cent-plus and they appear ready to defy the gloom.

This week Land Securities, the £5billion Reit with a portfolio that includes the Liverpool One shopping centre and the Piccadilly Lights in central London’s Piccadilly Circus, increased its stake in the Bluewater shopping centre in Kent. 

This followed the Reit’s £516million purchase of Newcastle’s Metrocentre. Among those vying to win control of the Metrocentre was Mike Ashley’s Frasers Group.

Why was it considered such a prize? Land Securities expects to collect £41million in rents after costs, giving an 8 per cent rental yield.

Matt Norris, manager of the TM Gravis UK Listed Property fund, which invests in Reits, says: ‘Reits are not broken businesses, it’s the valuations that are broken. Why UK institutions can’t see this is a mystery.

‘After all, your job as a manager is to make as much money as possible for your clients.’

Some private investors made money from this summer’s £14billion takeover of Segro, the data centre Reit. The buyer was the American industrial property titan Prologis, which paid 39 per cent more than Segro’s price at the beginning of the proceedings.

The acquisition of Segro was the biggest takeover of any kind this year in Britain.

Any further activity in the sector may not be on this scale, or as lucrative for investors.

But Reits are still on the shopping lists of American investors and maybe you should think of putting some in your trolley.

Where are the Reits going shopping?

Just 1 per cent of retail destinations account for 31 per cent of expenditure, according to data analytics group Caci, underlining the flight to quality in the sector.

Reits are scouting out these locations, the shopping centres where you can have a day out in glamorous surroundings with big-name stores. A lack of new supply of such centres is accelerating their recovery from their formerly unloved state.

In July, Hammerson took a 50 per cent stake in Manchester’s Arndale, highlighting this Reit’s comeback since the dark days of 2020 when it was compelled to raise cash merely to stay afloat.

Retail parks are also an enticing proposition. Occupancy can be as high as 99 per cent on these suburban or out-of-town sites because they provide parking and services like dentists.

Click-and-collect has proven a boon for retail parks. People pick up their parcels and stay to buy more items.

Thus e-commerce boosts bricks-and-mortar stores. Last month a partnership led by NewRiver Reit paid £74million for The Springs retail park in Leeds, where tenants include Boots, Marks & Spencer and Next.

This renaissance comes against a resurgence in wider Reit takeover activity.

In the past few days, Ancora, a US activist investor, has set its sights on self-storage specialist Reit Big Yellow, arguing that it should put itself up for sale.

Ancora considers that Big Yellow is worth 1236p a share, which is rather more than its 902p share price.

The wealth management firm describes Big Yellow’s portfolio, which is concentrated in London, as ‘scarce and irreplaceable’.

No sooner had it made this assessment than Irenic, another US activist, emerged, also calling for Big Yellow to find a suitor with big pockets.

Meanwhile, Harworth, the logistics Reit, was acquired last month for 187p per share by UK infrastructure group Peel.

This offer may have represented a 47 per cent per cent premium to Harworth’s average three-month share price, which sounds generous, but was still at a 10 per cent discount to the value of the Reit’s assets.

How can you shop for retail Reits?

If you agree with the American reckoning that British retail is unjustifiably unloved, you have a range of options.

Analysts at Goldman Sachs rate Land Securities’ shares a ‘buy’, pleasing news to shareholders like me.

The US banking giant, which seems to be a big Reits fan, also likes Hammerson.

NewRiver’s price is up almost 16 per cent this year to 79.5p. But analysts are targeting another advance in the shares of this Reit, where the yield is 8.7 per cent.

Supermarket Income Reit offers a 7.7 per cent yield – worth considering if you like this Reit’s

plan to double its £2.2billion portfolio of Marks & Spencer, Morrisons, Sainsbury’s, Tesco and Waitrose stores.

For exposure to the vast sheds that serve these and other omni-channel retailers, take a look at LondonMetric and Tritax Big Box. LondonMetric, an analysts’ favourite, offers a 7.3 per cent yield, thanks to its spread of holdings that extends beyond logistics to hotels and leisure parks.

LondonMetric is the most acquisitive Reit. Last month, together with Schroder Real Estate, it picked up Picton, the Reit that put itself up for sale at the start of the year, frustrated by the persistent undervaluation of its shares.

Tritax Big Box, my second Reit flutter, is also diversifying by building a major data centre near Heathrow.

Shaftesbury Capital, by contrast, is a Reit route to back the bright lights of the West End.

Shares in this Covent Garden and Soho retail and restaurant landlord are rated a ‘buy’, with an average target price of 172p, against 141.1p. This upbeat assessment means that Shaftesbury is on my shopping list.

All the better that some of its assets, such as the Seven Dials area of Covent Garden, are some of my most-loved places in London.

Other Reit solutions

Rundown malls do not draw shoppers and, in the same way, tired ‘secondary’ offices struggle to find tenants.

British Land, however, specialises in ‘talent infrastructure’ offices, the glossy London headquarters buildings that US tech companies demand.

This Reit’s shares, which were cited as a ‘buy’ at 386p in this column in May, have advanced to 417.4p. Goldman is now targeting an increase to 500p.

Such is the variety of Reits that it may make sense to acquire a basketful through a one-stop shop fund like Gravis UK Listed Property or an exchange-traded fund (ETF) like iShares UK Property.

The conviction that Reits are bargains, which emerged during that San Francisco conference, may not prove to be true in every case. But the yield should be a decent compensation.