A fund manager at Brooks Macdonald has pointed to what he has called the “disconnect” between real estate investment trusts and the property market, arguing Reits are now mispriced and oversold.
Niall O’Connor, fund manager at Brooks Macdonald Group’s funds division North Row Capital, has said there is a “big disconnect” between the positive prospects implied in the UK property market and the negativity in Reit valuations.
He pointed to the predictions from the Investment Property Forum which estimated UK property returns for 2016 would be 0.6 per cent.
Predictions for next year’s returns were higher, expecting to reach 1.3 per cent next year and 5 per cent in 2018.
Despite this positive picture for property, Mr O’Connor said Reits are “still suffering”, and have sold off quite significantly over 2016, with the index down 16 per cent for the year-to-date.
With Reits now trading at 30-35 per cent discount to their net asset value, he said Reit prices are “wrong” and undervalued, while the UK property market in general is overvalued by as much as 15 per cent.
He said this could be because Reits are more prime and office-focused, and therefore more exposed to the potential negative impact of Brexit.
The North Row manager also said the softened view on the UK property market has prompted a “liquidity-driven” sell-off, pointing out for example the Reits which have sold off the most are two of the largest, Land Securities and British Land.
Mr O’Connor said there is a “clear arbitrage opportunity” and advised investors to go long on cheap Reits.
Robbie Duncan, director of research at Numis Securities, agreed that Reits are oversold and said there is value in the sector, but warned the challenge is when you are looking for “discreet catalysts” that will "unlock value".
"The problem is there are huge amounts of uncertainty so I can justify the sell-off, but now we have to understand what is going to close that discount."
"With the absence of that catalyst then the Reit market can stay oversold and that will become the right price."
Mr Duncan said he is looking for letting announcements and evidence of tenant demand, which could prove Reits are oversold and could therefore make the discount narrow.
He predicted this will happen in London but only on a “stock by stock” basis, rather than sector-wide.
“Brexit has altered the risk profile of the UK,” he said, pointing out however that property yields should have moved up to reflect the additional risk.
The Numis research director also said the UK has become more risky because no one knows what the business environment will look like and what that will mean when it comes to demand for space.
Ben Yearsley, investment director at the Wealth Club, said: "At some point there will be a good buying opportunity for UK property and Reits; I'm not sure it's quite yet though.
"Land Securities is quite London-centric and there's an awful lot of office space under construction," he said, adding however the flip side is the depreciation of sterling could make the asset class attractive to overseas investors.
