2012 REIT report

UK: a fresh start for REITs?

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Current state of the market

The UK REIT regime began in January 2007, and by mid-2012 UK REITs had achieved a market capitalization of US$38.2 billion, according to SNL Financial.

UK REITs seem to be on the path to recovery; however, a potential barrier to this recovery might exist in the form of mergers and takeovers and new entrants coming into the market.

At year-end 2010, their capitalization was US$36.1 billion. This broadly reflects the performance of the wider equities market in the UK over the 2010–2011 period, and indicates that REITs in the UK, as in a number of other jurisdictions, still have a long way to go to reach their 2007 peak of US$65 billion.

Market outlook

The Government’s measures have now been enacted. The main changes include the removal of the REIT conversion charge for new entrants4. Because of the up-front cost, the charge has been widely viewed as a deterrent to the start-up of REITs.


UK REITs are showing signs of interest in buying properties and restarting development projects, many of which had been put on hold for the past several years. However, Europe’s sovereign debt crisis and the slowdown in the UK’s commercial property market have made REITs careful about their investments and developments.

Furthermore, in an environment where the capacity of bank lending is restricted by increasing regulation, banks remain cautious about their exposure to UK property investment. As a result, UK REITs have begun to look at alternative sources of financing.


Despite volatility in UK commercial property markets generally, REITs continue to see investment opportunities. Grade-A commercial properties in London are attracting interest from REITs and other domestic investors, as well as from foreign buyers.

The UK’s two largest REITs, Land Securities and British Land, are building two new skyscrapers in central London costing more than US$491 million each (£300 million). Land Securities’ “Walkie-Talkie” skyscraper and British Land’s Leadenhall Building, dubbed the “Cheesegrater,” are scheduled for completion in 2014. They will compete with a growing number of other new office buildings that will change London’s skyline significantly over the next few years.


As has been widely predicted, with the maturing of the UK REIT market, REITs are beginning to specialize in sectors of the UK property market. Liberty International’s de-merger5 in 2010 has resulted in a retail mall-focused REIT in Capital Shopping Centres Plc. Hammerson Plc has recently announced that it intends to dispose of its entire office portfolio and re-focus on its retail portfolio6. This will leave Land Securities and British Land as the only truly diversified REITs in the UK.

Joint ventures

Mirroring the wider UK property investment market, UK REITs are entering into an increasing number of joint ventures.

Historically, such structures have been the reserve of the largest REITs, but increasingly, smaller REITs are finding that they provide the best opportunity for growth. Among these is The Local Shopping REIT Plc, which has formed a number of joint ventures in the last 12 months.


UK REITs seem to be on the path to recovery; however, a potential barrier to this recovery might exist in the form of mergers and takeovers and new entrants coming into the market.

Because certain UK REIT shares are currently trading at significant discounts to NAV (the market average discount is 10% at the end of 2011), this has led to speculation that they could become targets for both private investors and other REITs from the UK and other countries.

This speculation was fueled in early 2012 with the acquisition of a large stake in French REIT Klēppierre, by US REIT Simon Property. Depending on this and other macroeconomic factors, UK REITs could experience more growth during the next few years through acquisitions and new development and, possibly, through more joint ventures.

  1. 4 HM Treasury, Budget 2011, “Property Taxes,” 2.157 REITs (Real Estate Investment Trusts), http://www.hm-treasury.gov.uk/2011budget_easyread.htm.
  2. 5 "Liberty International De-Merger and Change of Name," Capital Shopping Centres web site, http://www.capital-shopping-centres.co.uk/.
  3. 6 Simon Packard, "Hammerson to Sell Office Holdings and Reinvest Proceeds in Shopping Malls," Bloomberg, 23 February 2012, http://www.bloomberg.com/news/2012-02-24/hammerson-to-sell-office-holdings-and-reinvest-proceeds-in-shopping-malls.html.