REITs – Price Movement and size

We know that REITs have been doing well in share price performance since early November due to changes in interest rates (and therefore GILT) expectations. But I have been wondering if there is any correlation between the general size of the REIT and its recent price movement.

The following are the LSE listed REITs sorted by Market Capitalisation.

240110 REITS - Price Change Based on Size.xlsx

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The data indicates that from November 1st to December 31st, larger Real Estate Investment Trusts (REITs) experienced more significant increases in their share prices compared to smaller REITs. Additionally, this trend of larger REITs outperforming smaller ones seems to have persisted into the period following January 1st.

When breaking the data into segments this can be viewed with clarity

The analysis reveals a distinct difference in the performance of REITs based on their market capitalization. REITs with a market capitalization exceeding £1 billion exhibit a relatively lower discount to Net Asset Value (NAV), at 10.7%. Due to their higher valuations, these REITs have a yield of only 4.9%. Furthermore, in the two months leading up to Christmas, they averaged share price gains of 7.4%.

In contrast, smaller REITs with a market capitalization below £300 million continue to experience higher discounts to their Net Asset Values and offer correspondingly higher yields.

Why is this happening?

What are the reasons behind smaller REITs underperforming in comparison to their larger counterparts? One potential explanation is that smaller REITs inherently operate in sectors with higher risk. However, upon examining a generalized breakdown of subsectors we can see:

It appears that there are no specific subsectors predominantly influencing the performance of REITs valued at over 1 billion dollars.

Historical NAV Discounts

When we compile NAV Discounts from 2019 compared to 2023 we get the following:

240112 REITS - Discount to NAV - Comparisons 2019 to 2023.xlsx

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Aggregating the data based on REIT size:

The larger REITs remain with greater discounts compared to their historical figures, despite their recent price rises.

Valuing Based on NAV

Looking at the companies that have over 20% difference between their historic and current NAV discounts, assuming that due to market conditions a full return to historic nav discount is unlikely so taking 20% off the NAV Discounts and applying this to current NAV figures gives the following shares in order of discount to their Net Asset Values.

I would personally narrow this down further to companies that I prefer, having what I perceive as lower risk involved, on this basis alone (and I wouldn’t suggest investing in REITs on a return to NAV discounts of the past alone) I would pick:

Abrdn Property Income Trust Ltd

Big Yellow Group PLC

Safestore Holdings PLC

NAV Valuation Warning

A critical factor potentially affecting the data is the Net Asset Value. It is important to examine how companies' NAVs have evolved from 2019 to the end of 2023. Real Estate Investment Trusts often determine their property valuations based on rental yield multiples. This method appears effective during standard trading conditions. However, its suitability under current market dynamics is questionable. For instance, if a company experiences unusual vacancy rates or can lease properties at higher-than-average rates, this would lead to an increase in property valuations and consequently, the NAV. When considering the potential sale of parts of a property portfolio, it's debatable whether a company like Big Yellow could achieve improved sale prices as, for example, Warehouse REIT in the same location.