Hardman & Co has carried out several assessments of the REITs sector in the past; in 2024, we looked at whether they represented fair value in terms of their share prices compared with the average discount to NAV at which share prices traded over several historical cycles. We concluded, at that point, that REITs were trading at very close to the historical, long-run average but that the macroeconomic momentum was not strong enough to encourage us to view prospects for REIT share price performance positively. Since then, the share prices of many REITs have fallen in absolute and relative terms.
The trigger to our change in stance to a significantly more positive one is the recent turmoil in markets – particularly the sharp moves in US Treasury (bonds) in the immediate wake of President Trump’s global trade tariffs announcement.
We conclude that the likely lower degree of confidence in the US economy’s prospects allied to the US President’s public statement that he had some concerns around avoiding a sharp rise in US Treasury yields both point to accelerating interest rate cuts. Rate cuts will be seen both in the US but particularly in the UK, where the inflation effects from US tariff impositions should prove muted. As this document references UK REITs specifically, we see the reversal of the sustained share price declines, in the past few days, as symptomatic of more positive moves to come.
One factor boosting our confidence is the bottoming out of valuations across virtually all UK commercial real estate sectors since earlier in 2024, which is evidenced by rents, occupancy and valuations. Indeed, there are also outside factors helping, not confined to the tariff-related global shocks. One significant factor is the UK Government’s drive to Net Zero, with particular relevance to the EPC (Environmental Performance Certificate) C mandate for 2027 onwards.
