This report is from this week’s CNBC’s UK Exchange newsletter. Each Wednesday, Ian King brings you expert insights on the most important business stories from the U.K. and other key developments you won’t want to miss. Like what you see? You can subscribe here.
The dispatch
Episodes in which the mighty KKR receives a bloody nose are collector’s items — but we had one in the U.K. last week.
The private equity giant was thwarted in an attempt to buy Assura, a property company that owns more than 600 doctor’s surgeries and medical centers.
Shareholders instead accepted a £1.8 billion ($2.4 billion) rival offer in cash and shares from Primary Health Properties (PHP), a peer of Assura, which now becomes the U.K.’s biggest publicly traded healthcare landlord.
Apart from the novelty of KKR — which had teamed up with Stonepeak, the infrastructure investor — losing this David and Goliath battle, there were several striking elements to the contest, not least that PHP’s takeover still faces scrutiny by the Competition and Markets Authority (CMA), the U.K.’s competition watchdog.
There was also the fact that by making most of its offer in its shares, whose price fell toward the end of the takeover battle, PHP was actually offering slightly less than KKR and Stonepeak when investors had to decide.
And, most striking in a market tormenting itself for years over de-equitization after scores of take-private deals, is that investors were happy to maintain a shareholding in the enlarged PHP, accepting the execution risk that comes with this takeover, rather than just take KKR and Stonepeak’s cash.
That speaks to a bigger story — which is that U.K. stock market investors have concluded valuations in the country’s REIT (real estate investment trust) sector had become ridiculously low.
The Millennium Bridge backdropped by St. Paul’s Cathedral in central London on Nov. 15, 2024.
Henry Nicholls | Afp | Getty Images
There was a sense that KKR and Stonepeak were getting an outrageous bargain and also that PHP, founded 30 years ago by the property entrepreneur Harry Hyman, who remains the company’s chairman, deserved backing following years of consistent performance.
On the face of it, Assura — and, for that matter, PHP — should be a very sound investment.
As Britain’s National Health Service pivots to preventative treatment and delivering care to patients in their communities, rather than in city center hospitals, it is exposed to what should be a rapidly expanding sector when the population is ageing and where more patients have complex long-term medical needs.
That also means a growing reliance on private medicine — a huge opportunity for the business. Moreover, Assura — again, like PHP — enjoys highly predictable cashflows.
As Jonathan Murphy, the chief executive, noted in last month’s annual report and accounts: “Our total contracted rental income, which is a combination of our passing rent roll and lease length, stands at £2.5 billion, our weighted average unexpired lease term is 12.7 years and 97% of our income now comes from GPs, the NHS, the HSE (Health & Safety Executive), pharmacies and established independent sector healthcare operators.”
And yet, despite all that, Assura’s shares were still changing hands at a 21% discount to their net asset value (NAV) when KKR’s interest was first disclosed in February. That is remarkable given the majority of its rents, paid by the NHS, are effectively underwritten by the government.
The discount helps explain KKR’s interest, but Assura is just one example. The U.K.’s REIT sector has seen a wave of mergers and acquisitions over the last few years as private equity and trade buyers alike have sought to scoop up bargains.
Among the most active has been Tritax Big Box REIT, a £3.4 billion landlord specializing in the logistics sector with a portfolio of large warehouses, but which is now moving into data centers. It caught the eye when, in February last year, it acquired the smaller U.K. Commercial Property REIT for £924 million.
It is seeking to follow this with the acquisition of Warehouse REIT although, like PHP with Assura, faces competition from another U.S. private equity house in the form of Blackstone, which has offered £489 million for the business, itself still a significant discount to Warehouse REIT’s NAV.
A wave of consolidation
In the same part of the commercial property jungle, another player making waves is LondonMetric Property, which has come seemingly from nowhere to become the U.K.’s second-largest quoted property company and a FTSE-100 constituent.
It bought CT Property Trust for £199 million in late 2003, following it last year with the £1.9 billion acquisition of LXI, owner of the land occupied by the famous Thorpe Park and Alton Towers amusement parks.
Andrew Jones, its ambitious co-founder and chief executive, is now acquiring Urban Logistics REIT for £700 million and the smaller Highcroft Investments, another REIT, for £44 million.
Jones told Estates Gazette, the industry bible, in November last year that many smaller REITS — there were 19 listed in London at the time with a market capitalization of less than £1 billion — were mispriced and that it was “beholden upon those who can afford it, and have got the right rating, to do something about it.”
He added: “You have to wonder what the purpose of the small cap is. “If you’re less than £1 billion and you’re externally managed then I don’t see where your future lies in the listed space.”
That opinion appears to be shared by a growing number of quoted company investors prepared to back the likes of Jones and Hyman.
People stand at a lookout point in Greenwich Park, with the Canary Wharf business district in the distance, during sunny weather in London, on August 25, 2024.
Henry Nicholls | Afp | Getty Images
Others driving consolidation include NewRiver REIT, an owner of retail parks and centers, which at the end of last year bought the smaller Capital & Regional for £147 million, again in a mixture of cash and shares, while last week saw Unite Group, the U.K.’s biggest student landlord and another FTSE-100 constituent, announce it is buying Empiric Student Property, a smaller rival, for £723 million.
What all these deals have in common — aside from the fact that all the acquired businesses had been trading at a discount to NAV — is that investors are increasingly looking at REITs capable of building scale in niche areas such as healthcare and student housing and whose stock also offers greater liquidity.
This raises questions of how the traditional big two of U.K. commercial property — Land Securities (Landsec) and British Land — react. Both operate in a number of different parts of the property market and arguably have something of a conglomerate discount.
Both are led by energetic CEOs in Mark Allan and Simon Carter and, in British Land’s case, it also has a well-known banker — the former Lazard chair Will Rucker — as chairman and that can often be a portent for M&A.
With the number of quoted REITs in London having halved since 2019, investors are clearly rewarding scale and focus, but this may be storing up problems when the market properly rebounds and they have fewer options from which to choose.
Yet there is an impetus for action — especially now there are indications of a revival even in the most unloved of property sectors.
Sentiment toward offices has been depressed since the Covid pandemic unleashed a wave of home-working but it emerged last week that Canary Wharf — which is owned by the Canadian investment giant Brookfield and the Qatar Investment Authority and a landlord to the likes of Barclays, Morgan Stanley, Citi and JP Morgan — has enjoyed the first increase in the valuation of its offices in three years.
Offices have not really featured in the consolidation sweeping U.K. REITs in recent years.
It would be a surprise were that to remain the case.
Top TV picks on CNBC
Private money is becoming increasingly ubiquitous in European soccer, as private equity and VC firms build up their stakes in several major clubs. PitchBook’s Senior EMEA Private Capital Analyst at PitchBook Nicolas Moura joins “Squawk Box Europe” to discuss the phenomenon.
CNBC’s Ritika Gupta reports from Canary Wharf on London’s return to the office following the Covid-19 pandemic.
Dr. Kavita Patel, NBC News & MSNBC medical contributor, joins “Fast Money” to talk Eli Lilly raising Mounjaro prices.
— Holly Ellyatt
Need to know
Quote of the week
I think the people trying to read across from Donald Trump’s shifting of taxation and setting a different set of rules and people falling in line, the idea that other mid-sized countries can replicate that, is for the birds.
— Simon French, chief economist at Panmure Liberum
In the markets
Sterling has meanwhile ticked slightly higher against both the U.S. dollar and the euro, as traders pared back their bets on the pace of Bank of England rate cuts. As of Tuesday, just ahead of the July inflation print, money market pricing suggested a less than 50% likelihood of a further reduction from the current 4% this year. A move to 3.75% was previously fully priced in.
Expectations for the BOE to remain hawkish put pressure on U.K. government bonds. Despite a dip on Tuesday, the 10-year gilt yield nonetheless rose from 4.585% to 4.72% over the week, while the 2-year yield rose from 3.897% to 3.958%.
The performance of the Financial Times Stock Exchange 100 Index over the past year.
Coming Up
Aug. 20: U.K. inflation data for July
Aug. 21: UK flash PMIs for August
Aug. 22: GfK consumer confidence data
— Holly Ellyatt
