Cheap REITS? - Time to Buy?

A Deep Dive into UK Real Estate Investment Opportunities. (LON: BBOX, LON: GPE, LON: PHP & LON: PRSR

Feb 11, 2025

Dear reader,

Diversification is important in any portfolio. In this article I'm going to put some arguments for investing into REITs (and try to make it balanced) and why these should be in your portfolio. However, with any type of investment this is down to your decision making. You can find a list of all UK REITs listed on the FTSE in the end notes.

The article will be split into

What Can REITs Offer Investors?
4 REITs Across 4 Different Sectors (All FTSE 250 Listed)
Government-Backed REITs with Long-Term Leases
Outflows in UK REITs: What’s Driving the Trend?
UK vs US REITs: Key Differences and Opportunities
Can the Market Turn Around?
2024 REIT Acquisitions: The Biggest Deals So Far

What Can REIT’s offer the investor:

Diverse exposure: They offer investors access to various property sectors, including residential, commercial, and industrial real estate.
Tax efficiency: REITs are exempt from corporation tax, making them an attractive option for investors seeking tax-efficient returns.
High yield potential: REITs are required to distribute at least 90% of their profits to shareholders, often resulting in attractive dividend yields.
Liquidity: Being listed on the stock exchange, these FTSE 250 REITs provide easier entry and exit for investors compared to direct property ownership.

“REITs behave like direct real estate in the long run but more like financial assets in the shortrun”.

Lets take a look at 4 REITS on the FTSE 250 (each one in a different sector)

Tritax Big Box REIT (BBOX) is the UK's leading listed investor in large-scale logistics warehouses, with a £6.5 billion portfolio as of 2024. It focuses on modern, strategically located assets let to blue-chip tenants on long leases. BBOX benefits from e-commerce growth and supply chain trends, achieving 5.4% like-for-like rental value growth in 2024. With a significant land bank for development and a 5.16% dividend yield, it offers investors strong exposure to the thriving UK logistics property sector.

Dividend Yield: 5.16%
P.E: 19.30
Total debt/total equity: 0.4399
Occupancy rates: 97%

Great Portland Estates (GPE) is a leading UK REIT specializing in prime central London commercial real estate. As of September 2024, GPE's portfolio was valued at £2.5 billion, primarily comprising office, retail, and residential properties in the West End. The company has demonstrated robust leasing performance, signing new leases 7.0% above estimated rental value (ERV) in the six months to September 2024, with space under offer 16.2% above ERV. GPE maintains a strong financial position with a low loan-to-value ratio of 23.3% and substantial liquidity of £670 million in cash and undrawn facilities. The company has recently expanded its investment capacity through a £350 million rights issue, positioning itself to capitalize on emerging opportunities in the London real estate market

Dividend Yield: 4.05%
P.E: -36.25
Debt Levels: 0.4358
Occupancy rates: 98.5%

Primary Health Properties (PHP) is a leading UK REIT specializing in modern primary healthcare facilities, primarily GP surgeries. As of 2025, PHP's portfolio comprises 516 properties valued at £2.8 billion, with a contracted rent roll of £152.6 million. The company focuses on long-term leases to healthcare providers, with the majority of rental income funded by government bodies. PHP has demonstrated consistent dividend growth over 28 consecutive years, currently offering an attractive yield of approximately 7.4%. With a low vacancy rate, strong financial position, and ongoing development projects, PHP is well-positioned to benefit from increasing demand for modern healthcare facilities and government commitment to primary care infrastructure.

Dividend Yield: 7.57%
P.E: 13.47
Debt Levels: 0.9673
Occupancy rates: 99.3%

The PRS REIT (PRSR) is a leading UK REIT focused on high-quality, new-build family homes in the private rented sector. As of December 31, 2024, PRSR's portfolio comprised 5,437 completed homes with an estimated rental value (ERV) of £68.6 million per annum. The company has demonstrated strong performance with a 99% rent collection rate and 11% like-for-like rental growth on stabilized sites over the preceding 12 months. PRSR maintains high occupancy levels, with 96% physical occupancy and 97% including reserved homes. The REIT offers a dividend yield of 3.83% based on the January 2025 share price. With a focus on energy-efficient, well-located properties and a strong tenant base, PRSR is well-positioned to benefit from the UK's shortage of high-quality rental homes and increasing demand driven by population growth and household formation.

Dividend Yield: 3.66%
P:E: 6.3
Debt Levels: 0.57
Occupancy rates: 97%

Government-Backed and Long-Term Leases:

Let's take a look at one example, Primary Health Properties (PHP) REIT. Many argue that REITs such as PHP can offer a “safe harbour”. What is a safe harbour stock or sector, you might ask? According to Fidelity, “The traditional safe haven sectors include utilities, consumer staples, food retailers and pharmaceuticals”. Moreover, “You are looking to invest in companies that provide the goods and services that people buy through thick and thin, regardless of market conditions or the state of the economy”.

While this doesn’t explicitly reference GP buildings, it does emphasise investing in businesses that people must use—such as GP surgeries, pharmacies, and dental practices. If we examine PHP’s portfolio, it consists of 514 healthcare-focused properties across the UK and Ireland, valued at £2.8 billion. The majority of these assets are modern, purpose-built primary care facilities, including NHS health centres, pharmacies, and dental practices. With an occupancy rate of 99.3%, PHP benefits from stable, long-term rental income, with 89% of rents directly or indirectly backed by the UK and Irish governments.

PHP is also keen to highlight its government-backed growth potential, underpinned by rising NHS investment. “NHS England's budget will increase from £171bn in 2023/24 to £192bn in 2025/26, an increase of £21.0bn in cash terms”. While not a direct correlation, this increase in spending is expected to have a trickle-down effect, supporting new healthcare developments and expansions. The growing demand for larger, integrated primary care hubs, combined with an ageing population and increased prevalence of chronic conditions, reinforces the long-term sustainability of PHP’s investment model.

With long lease terms (WAULT of 10.2 years), inflation-linked rental uplifts, and a government-backed tenant base, PHP offers an attractive combination of security, growth, and resilience.

Interest Rate Sensitive:

Interest rates have a direct and significant impact on REITs, particularly in the UK, where listed property companies rely on debt to finance acquisitions and developments. When interest rates rise, borrowing costs increase, compressing profit margins and reducing the attractiveness of further expansion. Higher rates also dampen property valuations, as investors demand higher yields to compensate for the increased risk-free rate. This was evident in 2022-2023, when the Bank of England’s aggressive rate hikes to combat inflation led to a sharp decline in UK REIT share prices, with the FTSE 350 Real Estate Index falling over 30% from its 2021 highs.

Companies such as British Land (BLND) and Land Securities (LAND) saw their stock prices tumble as higher financing costs and valuation declines took hold. However, some sectors, including healthcare REITs like Primary Health Properties (PHP), have been more resilient due to long-term, government-backed leases with inflation-linked rental uplifts, which help mitigate the impact of rising rates. That said, sustained high rates could still weigh on REIT performance, as refinancing debt at higher costs can erode earnings and dividend cover, making yield-focused investors more cautious.

REITs are interest-rate-sensitive, which means they tend to outperform the broad market when interest rates fall – and underperform when interest rates rise. Many trusts are therefore trading at big discounts: for example, Tritax Big Box BBOX, a trust worth worth more than £3 billion, is trading at a near 30% discount to NAV

Large Out flows in UK REITS

The UK REIT sector continues to face significant challenges, as evidenced by the persistent outflows observed in recent years. In 2024, investors withdrew nearly £1.2 billion from UK property funds, marking the sixth consecutive year of outflows and bringing the total exodus to almost £7 billion since 2018. This trend has been exacerbated by various factors, including the lingering effects of the pandemic, rising interest rates, and structural shifts in property demand.

For instance, the closure of high-profile funds like the St James's Place Property Fund, following similar moves by M&G, Aegon, and Aviva, underscores the liquidity mismatch inherent in open-ended property funds. Moreover, even REITs, which theoretically offer better liquidity, are trading at substantial discounts, with Tritax Big Box REIT operating at a nearly 30% discount to its net asset value. These developments suggest a broader loss of confidence in the UK property market and highlight the urgent need for innovation in fund structures to better align with investor expectations and market realities.

UK VS US REIT Sector Performance:

The performance disparity between UK and US REITs has indeed been significant in recent years. US REITs have shown stronger performance, trading at a -4.4x earnings multiple spread to equities as of August 31, 2024, compared to the historical average of 0.4x. This suggests potential undervaluation and growth opportunities in the US REIT market.

UK REITs, on the other hand, have faced more substantial challenges. Despite experiencing a 25% rebound from multi-year lows hit in October 2023, UK REITs were still trading at a -16% discount to net asset values as of late 2024. This recovery was driven by improving market conditions, including a drop in the 5-year swap rate from 4.60% to 3.6% and expectations of further interest rate cuts.

The US REIT market has demonstrated resilience, with data centers and healthcare REITs performing particularly well in 2024, returning 25.2% and 24.2% respectively. In contrast, UK REITs have shown mixed performance across sectors, with regional malls outperforming at 27.4%, while industrial REITs lagged at -17.8%

Can it all Change?

The UK REIT sector has reason for cautious optimism as we move through 2025, with several positive indicators emerging. Firstly, the sector has shown resilience, experiencing a 25% rebound from multi-year lows hit in October 2023. This recovery has been driven by improving market conditions, including a drop in the 5-year swap rate from 4.60% to 3.6% and expectations of further interest rate cuts.

Furthermore, the fundamentals of the UK real estate market are strengthening. Limited supply and rising demand across residential, commercial, and rural sectors bode well for both rents and capital values. This is evidenced by success stories such as Schroder Real Estate's Stanley Green industrial asset, which was valued at £40m in March 2024, up from its £26.3m acquisition and development cost. The sector is also seeing increased corporate activity, with mergers and acquisitions demonstrating that buyers perceive value in current discounts to net asset value. Notable examples include the merger between Capital & Regional and NewRiver REIT, and Tritax BigBox's acquisition of UK Commercial Property.

These developments, coupled with expectations of further interest rate cuts in 2025, improving project viability, and a wider range of buyers returning to the market, suggest that the UK REIT sector may be poised for a period of growth and renewed investor interest.

“As unloved sectors can trade sideways for months, if not years, before an upsurge in enthusiasm. We saw that most clearly in the biotech sector, which went through a multi-year bear cycle and bottomed out at some point in spring 2022 but then spent nearly 18 months going nowhere, before moving decisively higher last autumn.

I suspect it will be a similar story for the listed office funds real estate investment trust (Reit) sector”

2024 aquasaitions of REITs:

An interesting time for REITs listed on the LSE. I have listed some that were involved in acquisitions during 2023 and 2024. I think we will see many more as the UK market looks to be cheaper and cheaper

UK Commercial Property REIT: Acquired by Tritax Big Box REIT in 2024.
Capital & Regional: Merged with NewRiver REIT in 2024.
Supermarket Income REIT: While not acquired, it made a significant acquisition of a Sainsbury's omnichannel supermarket in 2024, demonstrating the ongoing consolidation in the sector.
NewRiver REIT: Acquired Ellandi, an asset management company, in 2024, enhancing its portfolio management capabilities.
Derwent London: Acquired the remaining 50% stake in its proposed 50 Baker Street W1 scheme from Lazari Investments in December 2024.

“The REIT sector has seen multiple mergers and acquisitions in 2024. UK Commercial Property REIT was taken over by Tritax Big Box BBOX, LXi REIT was acquired by LondonMetric LMP, and Capital & Regional was taken over by NewRiver REIT NRR. Also noteworthy was the takeover of former REIT giant Civitas Social Housing, acquired by a Hong Kong property developer”.

THE END

I'm a REIT investor myself, and I think the benefits can be quite compelling. I appreciate the steady income that REITs can provide, and if it’s a well-performing REIT, the returns can increase over time. However, I’m also aware of the risks, especially since some well-known investors won’t touch REITs. I tend to be cautious and diversify my portfolio across a few different REITs.

That said, REITs can be well-managed and offer impressive returns. I was a holder in Civitas Social Housing REIT, which gave me a lovely return. I was gradually building my stake when they were bought out!

As with any investment, there are both positives and negatives when it comes to REIT.

Corfe Capital

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