Two leading brokers have speculated that there could be a resurgence of M&A activity in the “overcrowded” public real estate market.
Jefferies said the fact that share prices of UK REITs were not rising as fast as property prices should drive M&A among the 78 UK listed real estate companies. He said REITs were currently trading at an 11% average discount to the broker’s estimates of forward NAVs.
“This dislocation should stimulate M&A activity,” said Jefferies analyst Mike Prew. “In the current phase of the cycle with cheap and plentiful capital, the most likely form of M&A is management buyouts. Only REIT managements know the intrinsic value of their businesses.”
Meanwhile, Liberum said consolidation was most likely to occur within specialist sub-sectors such as retail, student accommodation or healthcare. “Increasing specialisation makes it unlikely that M&A will take place for the sake of diversification,” the broker said.
There had been renewed speculation over the summer that Europe’s largest listed property company Unibail Rodamco would bid for Hammerson, it added.
However, it said such a deal would be dilutive to earnings and therefore unlikely. Liberum analyst Michael Burt said it was more likely that Hammerson would be a buyer in continental Europe.
Burt told Property Week that smaller European companies were trading at lower price-to-earnings ratios than Hammerson so it was feasible for the UK-based REIT to pay a premium and still secure a deal that would improve its earnings per share. He also said an M&A deal would be a way of giving Hammerson’s European business much-needed scale after it recently lost out in the bidding for the NEO regeneration project in Brussels and the Beaugrenelle shopping centre in Paris.
“Hammerson has a full plc cost base in France and the asset base is not sufficient to justify it,” said Burt. “Buying a continental rival would be a way of adding meaningful scale.”