The recent slump in shares in UK real estate investment trusts (REITs) presents a buying opportunity, according to Cohen Steers.
The New York-headquartered listed real assets specialist believes select companies are in a position to weather the fallout from the UK’s shock vote to leave the European Union.
Rogier Quirijns, European real estate securities portfolio manager, said: “This current sell-off has created potential opportunities in REITs that have built up a strong long-term income and growth profile.
“Average leases in many REITs are in excess of 10 years and we do not believe the UK faces a severe recession or a ‘Lehman’ event – therefore cash flows should remain robust over the long term.”
Cohen & Steers expects UK economic growth to slow to a standstill next year with London faring worse – possibly even a localised recession.
At the end of last year, the company cut its exposure almost entirely to London office and development markets, partly in response to slowing rental growth. Today it is focusing on sectors that might be more immune to Brexit fallout, including logistics, self-storage, student housing and healthcare.
“Most REITs have significantly altered underlying portfolios in recent times,” Quirijns said. ”We prefer these sector-based opportunities rather than investing in the UK majors.”
He cited, as examples, Hammerson, which has sold its office portfolio to be exclusively focused on the retail property, and Segro, which has offloaded all its non-core exposure and “increased focus on locations and assets benefitting from strong structural and secular trends, such as e-commerce and urbanisation”.
Quirijns said lower levels of leverage and an increased focus on income also made UK REITs robust.
“A very important initial positive is the fact loan-to-value rates are well below 40%, with many even below 25%,” he said.
“This will allow REITs to withstand a serious fall back in values of more than 30% – even though this level of pullback is unlikely in our view.
“Our base case is for decreases in the 15-20% range – with the notable exception of the London residential and office markets, which could see sharper declines.”