A ‘credit crunch’ is a severe shortage of money or credit in the economy (Jowsey, 2011)
The global downturn was triggered from the sub-prime lending of US banks during the 2000-2007 property market boom. The US banks had relaxed their lending criteria, and high-risk mortgage loans were being issued to individuals with poor credit histories. August 2007 saw the first stage of the bubble bursting when the French bank BNP Paribas reported a lack of funds in their investor markets due to a complete evaporation of liquidity in the market (Jowsey, 2011) This caused banks to stop lending to each other. The following 12 months saw catastrophic losses by global banks. By November 2009 the Eurozone, the UK and the USA were all in recession.
The UK entered a double dip recession in 2012 with the economy shrinking, as shown in figure 3 where UK economic growth is shown through Gross Domestic Product (GDP). This gives a visual representation of the effects of the global downturn in the UK. The severity of the downturn in 2008 with negative growth had an effect on all types of business. The dramatic fall in share prices of UK property companies, including UK REITs, is shown in figure 3 which correlates with this GDP performance.
Figure 3– UK GDP Growth, Quarter on Previous Quarter (BBC, 2013)
David Isaac and John O’Leary (2011) comment on the fragility of property markets and the consequent difficulties encountered by forecasters. They state that a better way to look at the issues of such markets may be to:
…consider the underlying relationships between the macro-economy and average business performance which could be thought of as a proxy measure of the ability of businesses to pay for their premises (Isaac and O’Leary, 2011, p.291)
Reference is made to the performance of GDP being a ‘proxy measure’ whereby growth represents success and ability to pay rent of businesses resulting in good market performance and therefore increased investor confidence. Figure 4 below shows positive GDP growth after the recession. It is expected that investor demand will increase and therefore investment in UK REITs will likewise increase.
Figure 4 UK GDP Growth Rate (Trading Economics, 2018)
The UK listed property sector saw a major fall in shares, including real estate investment trusts (Jowsey, 2011). This is evident in Figure 1 of this report where share prices showed continued growth before peaking and falling dramatically from mid-2007 and throughout 2008.
Equity market performance was also dramatically affected in the downturn with sharp falls throughout 2008, as shown in Figure 5. Shape falls in the FTSE markets naturally cause investors to be nervous and uncomfortable.
Figure 5 FTSE 100 and FTSE All Shares Performance Data (Source British Land, 2013)
2.4.3 Performance of UK REITs
Peter Beckett, tax director in Ernst & Young, stated in a press release in April 2009 that:
“REITs will find it increasingly difficult to manage in the current climate” (Ernst & Young, 2009)
The importance of business strategy and positioning is highlighted by this point. 2009 saw British Land’s strategy and positioning focus on prime property, predictable cash flows and careful risk management in order to ride out the economic turmoil (British Land, 2008).
Despite positive global REIT performance, UK REIT performance was poor leading into 2010. The previous three years saw a negative return of -26% for UK REITs and a decline in total market capitalisation of 10% (Ernst & Young, 2010).
Mid-2012 Market Capitalisation achieved US$38.2 billion which was up on the 2010 year end figure but this still has a long way to go to reach the 2007 peak of US$65 billion (Ernst & Young, 2016).
Prime commercial space in London is continuing to attract investors and, with the new development of two new London skyscrapers currently under construction from British Land and Land Securities, it is hoped that further investment will follow. It is suggested that the true recovery of UK Real Estate Investment will occur once investment spreads to outlying markets and not only London (Ernst & Young, 2016).
Since their introduction in 2007 in the UK, REITs have shown disappointing returns (as might be expected given the market conditions) but they allow much greater liquidity than direct investment in property with the same effective tax treatment (Jowsey, 2011b, p.363)
Primary data comprising historical information of the REITs will be collected then a primary research will be conducted in the project with an aim to assess the performance of UK REITs since their introduction in 2007 whilst considering their expectations, the effects of the recession and the changes to legislation.
A collection of secondary research will also be conducted into gaining an understanding of how commercial property investment works, specifically into indirect property investment methods and how REITs operate. An additional collection of secondary research will be carried out to gain an understanding of the current performance of the indirect property investment method (UK-REIT) whether they are living up to their expectations since the introduction of REIT in the UK and the expectations for the sector to move forward.
Qualitative research, on the other hand, is the points of view of participants providing rich, deep data. Dawson (2007) comments that:
Qualitative research explores attitudes, behaviour and experiences through such methods as interviews or focus groups. It attempts to get an in-depth opinion from participants (Dawson, 2007, p.15-16)
Quantitative research is able to provide a variety of quantified data which can then be used to construct graphs and charts to illustrate answers to a wide range of questions. Although this may provide statistical and precise data for the research project, quantitative research techniques do not offer the researcher with sophisticated in-depth views by participants on the subject topic.
“All interviews have one thing in common: they are purposeful discussions between two or more people” (Saunders et al, 2009)
3.2 The Secondary Research
Dawson (2007) defines secondary research as:
…the collection of information from studies that other researchers have made of a subject
(Dawson, 2007, p42)
Dawson (2007) also makes comment to the reliability of sources such as the internet. The author has made effort to use reliable and established sources providing accurate analysis.
Secondary research, by way of the literature review, was carried out prior to case studies and primary research allowing the author to expand knowledge of the topic and better understanding of the research area. Literature sources included the BPF, Government publications and professional reports.
The author found limitations with the availability of published data regarding UK REITs due to their recent introduction. As a result, the definition of key terminology and legislation was primarily taken from company research reports rather than published texts.
3.3 Primary Research
Primary research provided the author with the opportunity to gain professional opinion and data of the topic, that of which secondary data cannot show. Farrell (2011) defines primary data as:
New data generated by the efforts of the researcher; that is, the words or numbers that you use in your analysis are created specifically for your research. (Farrell, 2011)
The author found the analysis of data available in company accounts more suited to the aims and objectives of this performance study. This data, although secondary, has been analysed by way of a case study looking at actual performance. Primary research was conducted by way of questionnaires
“The term questionnaire refers to all methods of data collection in which each potential respondent is asked to answer the same set of questions in the same order” (Saunders et al, 2009)
Questionnaires can be completed via the use of the internet, by post, by hand or via an interviewer where a questionnaire can be completed by the use of a structured interview. The results of questionnaires and structured interviews are often construed into quantitative data and presented using charts and tables.
The chosen method of research for this research project is to use questionnaires, which will be able to provide resourceful qualitative data, gaining an in-depth analysis on the chosen subject. To enable questionnaires to take place, a variety of key contacts within the industry are contacted via e-mail to request them to complete the questionnaires based on the research project.
The author created an extensive contact list consisting of well positioned individuals from all UK REITs, investment agents and other REIT specialists. Quality of data return was important to the author and therefore the majority of contacts were, for example, chief executives and managing directors. Emails were sent individually addressed labelling the company and area of expertise of that individual to further improve return rates.
3.4 Case Studies
Simons (2009) defines a case study as:
an in-depth exploration from multiple perspectives… The primary purpose is to generate in-depth understanding of a specific topic (Simons, 2009, p.21)
The author used case studies to analyse performance using secondary data available in company accounts. This allows analysis of data in both a qualitative and quantitative manor.
The composition and comparison of individual case studies is a ‘multiple case holistic design’ (Yin, 2003). Yin (2003) suggests that evidence from multiple cases is often considered more compelling, and the overall study is therefore regarded as being more robust. Although replication of each case provides robust findings caution was given to the duplication of exact conditions as to not provide bias results (Yin, 2003). The author studied each case individually with comparison made at the end to prevent any duplication of results.
Yin (2003) discusses “six sources of evidence” used in case study research; documentation, archival records, interviews, direct observations, participant observation and physical artefacts. The author has used documentation as a single source of evidence for each case study. Strengths of documentation evidence are that it is stable, unobtrusive, exact and has broad coverage (Yin, 2003).
Company account data will be analysed through annual reports of three of the UKs largest property companies:
- Land Securities
- British Land
The study will evaluate performance over 9 years before Brexit from 2007-2015 with focus on NAV, ROCE, share price and portfolio value. Further data from each report has been included where necessary.
The aim of this case study is to provide evaluative information to achieve the objectives of the study by proving a comparison of performance over a term of 9 years. Data analysis will be evaluated to prove or disprove the hypothesis that:
Real Estate Investment Trust status has brought success to companies that have joined the regime since their introduction to the UK in 2007.
4.2 Land Securities (LS)
Early measures of successful performance are evident in 2007 with an increase in total assets and earnings before interest and tax of 32.5% and 73.9% respectively, evident in figures 6 and 7 below. The £293m sale of joint venture Telereal, the valuation surplus of investment portfolio and increased rental growth with low interest rates were all influencing factors on performance. Peter Birch suggests performance was strong with unprecedented levels of property value growth which was predicted not to continue in all property sectors (Land Securities, 2006).
Table 1 Land Securities Net Asset Value Accounts Data
|NAV £m||Data Source Reference|
|2007||10579.4||4529.1||6050.3||(Land Securities, 2006)|
|2008||14025.4||6531.5||7493.9||(Land Securities, 2007)|
|2009||18957.5||8166.2||10791.3||(Land Securities, 2008)|
|2010||16615.1||7032.2||9582.9||(Land Securities, 2009)|
|2011||11171.7||6351.5||4820.2||(Land Securities, 2010)|
|2012||9722.9||4033.9||5689||(Land Securities, 2011)|
|2013||11215.9||4298.6||7486.7||(Land Securities, 2012)|
|(Land Securities, 2013)
(Land Securities, 2014)
(Land Securities, 2015)
(Land Securities, 2016)
Figure 6: Land Securities Net Asset Value
Pre-tax profits were down in 2007 however successful investment and leasing up saw NAV increase 44%. January 2007 saw the REIT status conversion for British Land bringing positive performance. Tax benefits from REIT conversion were noticeable in share price return and net assets per share – showing sustained growth, as visible in figure 8 where basic earnings increased dramatically to a peak in 2007. Share price was strong going off positive performance shown throughout 2 years before 2007 and shows increased business confidence.
The effects of the recession are truly recognisable through demanding market conditions in 2008, evident in pre-tax loss from 2007. Market conditions resulted in a valuation deficit on the investment portfolio. The sale of £1.5bn of investment property (Land Securities, 2008) through the year was used to retain balance sheets causing NAV to drop as shown in figure 6. Table 2 shows the loss in profit before tax with a change in return of capital employed from 18.7% to -5.1%. The 2008 Chairman message, from Paul Myners, states:
We anticipated these changing conditions and have been preparing the company accordingly. We limited acquisitions, accelerated sales, reduced our exposure to development risk and planned our funding conservatively. (Land Securities, 2008, p.8)
Table 2Land Securities Return on Capital Employed Accounts Data
|Year||EBIT||Capital Employed||ROCE %||Data Source|
|2007||2020.7||10791.3||18.725||(Land Securities, 2007)|
|2008||-492.3||9582.9||-5.137||(Land Securities, 2008)|
|2009||-3841.7||4820.2||-79.700||(Land Securities, 2009)|
|2010||1143.8||5689||20.105||(Land Securities, 2010)|
|2011||1299.5||6812.3||19.075||(Land Securities, 2011)|
|2012||645.1||7155.6||9.015||(Land Securities, 2012)|
Figure 7 Land Securities Return on Capital Employed
Changes in company targets and annual account data show the dramatic impact of the recession on performance in 2008. Basic earnings per share (figure 8) and share price (figure 9) both show negative trends reflecting a drop in investor confidence.
Figure 8 Land Securities Basic Earnings per Share Price (change in %)
(Land Securities, 2016)
Figure 9 Land Securities Share Price History
(Land Securities, 2016)
Regardless of this, evidence shows that REIT benefits from conversion through tax on earnings per share. International shareholders increased from 23% to 37% since March 2005 (Land Securities, 2008) showing that REIT status attracted international capital and potentially wider demand for shares.
Pre-tax losses continued to affect the performance of REIT in 2009. Fragile market conditions restricted investment requiring a high volume of sales which lowered total assets by 32.7% in 2008. This resulted in NAV being at its lowest in recent years, as shown in figure 9. Increased revenue from sales managed the balance sheet effectively thereby retaining a valuable performance indicator. Falls in market sector value resulted in a ‘Rights Offering’, the issuing of new shares to shareholders often at a discounted rate, raising a further £756m (Land Securities, 2009). This issuing of new shares affected share price and performance. Figures 8 and 9 show performance bottoming in 2009.
Business focus moved to asset management in 2009 due to the recession. Flexible lease terms, service charge reviews and flexible rent payment schemes were just some of the changes LS felt necessary in order to respond to drops in rental values of 9.3% over the portfolio (Land Securities, 2009).
Asset disposal continued in 2010 bringing asset value down 13.9% yet showing growth in NAV from 2009. Recovery is evident with portfolio value increasing 10.3% and the restart in developments. Script Dividend offerings to shareholders provided retained capital for balance sheet management with 41% of shareholders agreeing (Land Securities, 2010). Although performance shows signs of growth, revenue profit was down 20% on previous years due to losses through asset sales and tenant insolvencies caused by the recession.
2011 saw focus move from strict asset and balance sheet management to include new development focus. Emphasis on sustainability showed confidence in the company as they looked towards recovery. NAV growth of 19.7% (table 1) and growth in earnings (table 2) provided evidence for shareholder confidence therefore increasing share price (figure 9).
Economic uncertainty in 2012 affected performance potential. Focus returned to asset management with difficult leasing conditions and falling rents. Rising yields brought valuation surplus of £190.9m which had been below £908.8m in 2011 and £863.8m in 2010 (Land Securities, 2012). EBIT dropped 50% from the following year due to economic uncertainty causing retail performance to drop, evident in table 2 with the severity of the drop visualised in figure 7.
4.2.1. Land Securities Findings
Positive performance is evident prior to the introduction of UK REITs in strong market conditions. REIT conversion saw share prices at a record high with an increase in international shareholders showing success in the regime for LS. When the recession hit in 2008/09 it forced asset disposal for the benefit of the balance sheet. Company focus moved to asset management and occupier needs, with new developments put on hold. NAV dropped 47.2% in 2010 after peaking in 2007. 2011 saw an attempt at recovery with development focus and promising financial performance, however economic uncertainty in 2012 caused businesses to be cautious because of the double-dip recession.
Land Securities have coped through strong balance sheet performance with seemingly good liquidity of illiquid assets. Market dominance allowed development to continue in 2015 therefore gaining shareholder trust through maximising returns.
4.3 Hammerson (HAM)
Annual Accounts date from 31 December of each year. Hammerson’s investment portfolio primarily includes prime retail and office in the UK and France with assets in Germany. Hammerson joined the French SIIC tax regime in 2004 and the UK REIT regime in January 2007 (Hammerson, 2006).
Performance in 2007 was strong with vacancy rates down to 3.4% with new developments underway. Capital recycling disposes of weaker performing assets for investment with attractive yields; table 3 shows asset increase of over £1bn from 2005 with NAV growing by 32.9%.
Portfolio value increased from £6.7b to £7.3b in 2007 further growing NAV. Rental income grew and vacancy rates reduced from 3.4% to 1.8% (Hammerson, 2007). Figure 15 below shows share price increasing dramatically since 2003 with a peak in 2007 following promising market returns. Real estate values dropped in 2007 with poor second half performance resulting in weakening consumer confidence; table 4 shows EBIT drop as a result. French markets remained healthy benefiting from falling unemployment and increased market confidence. As a result of this, their 2008 portfolio weighting was 60% UK investment, a decrease of 14% in 2006 (Hammerson, 2008).
Poor performance through 2008, due to the recession, saw profits and asset values down with gearing reaching 118%. High gearing is a concern to investors showing inability to cover debt resulting from a risky investment. Share price (figure 12) and basic share price earnings (figure 11) highlight investor risk. Poor NAV and high gearing forced the sale of assets, however a lack of debt finance for investors proved illiquidity of assets restricting these disposals. A ‘Rights Issue’ was announced in 2009 to raise capital. Portfolio value fell by £1.6bn in 2008 due to the change of focusing on asset management and stopping development.
Table 3 Hammerson Net Asset Value Accounts Data
NAV per share (£)
Figure 10 Hammerson Net Asset Value
(Data Source- Table 3)
Poor NAV performance in 2009 was a result of disposals which raised £670m. £584m was raised through their shareholder ‘Rights Issue’. This capital lowered gearing from 118% to 72% however it left a weakening portfolio value of £5.1b after a further valuation decrease of £444m. Share price bottomed in 2009 with basic earnings per share remaining negative, as shown in figures 14 and 15. Poor economic performance made new leases difficult which brought negative returns for the year with ROCE at -11.2.
Figure 11 Hammerson Basic Share Price Earnings (per share)
Source: (Hammerson, 2005-2015)
Figure 12 Hammerson Share Price History
Source: (Hammerson, 2005-2015)
Gearing levels in 2010 stabilised at 52%, showing less risk to shareholders. Portfolio value increased by £447m bringing increased confidence and new opportunities with new development starting. Despite positive signs of recovery, occupiers remained cautious and business strategy limited developments without pre-lets.
Growth continued in 2011 with net rental income up 4%, NAV up 8.3% and portfolio occupancy up at 97.9% (Hammerson, 2011). Despite this, economic uncertainty resulted in a lack of investor and consumer confidence, evident in the drop in ROCE shown in figure 13. Uncertainty in the market brought limited investor demand.
Table 4 – Hammerson Return on Capital Employed Accounts Data
|Year||EBIT||Capital Employed||ROCE||Data Source
Figure 13 – Hammerson Return on Capital Employed
(Data Source – Table 4)
2011 saw a full review of business strategy resulting in Hammerson becoming a retail specialist REIT. Office assets were to be disposed over the mid-term to achieve maximum return. Focus continued from the recession on asset management with investment and development opportunities being carefully selected.
2012 saw the application of retail business focus with disposal of office assets raising £627m with £541m invested into new target retail areas. In 2015, increase in new assets resulted in NAV increasing. Share price performance continued to be slow with basic earnings continuing to drop. This brought NAV per share down showing poor performance to investors, evident in figure 10.
4.3.1 Hammerson Findings
Geographical portfolio diversification allowed Hammerson’s to change portfolio weighting through investment in different markets depending on best performance. Capital transfers between sterling and the euro are restricted with exchange rates however good rates are beneficial. This provides potential revenue as well as flexible portfolio investment.
Focus on strong tenants and prime assets in prime locations have undoubtedly helped Hammerson’s through the recession. Retail focus in 2011, however, saw an uncertain economy affect performance with weak NAV and falling ROCE.
Retail tenant defaults were more common therefore bringing increased risk. Despite this, increased focus on top prime retail assets would allow for increased future investment.
4.4 British Land (BL)
Prime retail and office investments make up a diverse portfolio for BL.
Company focus is on capital recycling, active management, customer focus and strategic investment. BL converted to a REIT in January 2007 permitting tax benefits but needing little change in their operations to comply.
2006 had seen record financial results. Gross rental income was up 19% and NAV was up 25.7% with a valuation surplus of £1,771m being a major influencing factor as evident in table 8 below (British Land, 2006). Strong investment markets allowed focus on strengthening future security.
REIT conversion in 2007, following such a strong financial year, brought investor confidence resulting in increased share prices which peaked in that year, as shown in figure 15. Comments made in the 2007 Chairman’s statement showed confidence in future performance:
REITs can further improve returns from active, tax efficient portfolio management. And with the benefits of liquidity, governance, management talent and gearing, I expect UK REITs to take market share from less liquid private and institutional property vehicles over the medium term. (British Land, 2007, p.6)
Global market turmoil saw continued year-on-year growth drop. Total portfolio value decreased from £16,903m in 2007 to £13,371m in 2008 (British Land, 2008), primarily due to property values decrease. Asset value reduced 22.7% as a result of property disposals, shown in table 5. Disposals were used to manage balance sheets whilst reducing exposure to market conditions.
Table 5 British Land Net Asset Value Accounts Data
|NAV £m||EPRA NAV per share||Data Source Reference|
|2005||12,278||(7,495)||4783||1128p||(British Land, 2005)|
|2006||13,512||(7,496)||6016||1486p||(British Land, 2006)|
|2007||16,380||(7,633)||8747||1682p||(British Land, 2007)|
|2008||12,648||(5,858)||6790||1344p||(British Land, 2008)|
|2009||7,578||(4,369)||3209||398p||(British Land, 2009)|
|2010||6,398||(2,190)||4208||504p||(British Land, 2010)|
|2011||7,260||(2,330)||4930||567p||(British Land, 2011)|
|2012||8,158||(3,054)||5104||595p||(British Land, 2012)|
|2013||8,269||2,582||5687||596p||(British Land, 2013)|
|2014||10,779||3,662||7117||688p||(British Land, 2014)|
|2015||13,001||4,436||8565||829p||(British Land, 2015)|
Figure 14 British Land Net Asset Value
(Data Source- Table 5)
British Land annual report (2009) showed continuing global turmoil throughout 2009 with a decline of 28% in portfolio value to £8,625m. Property sales of £1.9bn were a major factor lowering NAV by 52.7%, as shown in figure 17 above. A ‘Rights Issue’, completed in March 2009, raised £740m improving balance sheet performance. Development potential was restricted due lack of debt finance available to investors and occupancy rates lowered due to occupier uncertainty.
Economic recovery was evident in 2010 despite gross rental income and pre-tax profits being down. The management objective was to rebalance the portfolio and strengthen the balance sheet, resulting in further disposals. This took portfolio value down to £8,539m despite a valuation surplus (British Land, 2017). The BL Annual Report (2010) observed that new development was becoming attractive once again further to strengthening investor demand and asset prices. New development investment of £500m highlighted the financial strength and market confidence in BL.
Market confidence continued in 2011 with increased share price evidence of this as shown in figure 19. Table 9 shows increased earnings with figure 17 showing an increase in NAV. Portfolio and asset value increased with a valuation surplus and occupancy was up 1% across the portfolio (British Land, 2011). REIT status was continuing to attract international investors with Europe investment also improving dominance.
Table 6 British Land Return on Capital Employed Accounts Data
|2005||181||4783||3.784||(British Land, 2005)|
|2006||228||6016||3.789||(British Land, 2006)|
|2007||257||8747||2.938||(British Land, 2007)|
|2008||284||6790||4.182||(British Land, 2008)|
|2009||268||3209||8.351||(British Land, 2009)|
|2010||249||4208||5.917||(British Land, 2010)|
|2011||256||4930||5.192||(British Land, 2011)|
|2012||269||5104||5.270||(British Land, 2012)|
|2013||193||4825||4.000||(British Land, 2013)|
|2014||733||7533||9.730||(British Land, 2014)|
|2015||1063||9726||10.930||(British Land, 2015)|
Figure 15 British Land Return on Capital Employed
(Data Source- Table 6)
Poor economic activity through 2012 saw increased risk with retail administrations and cautious business activity. Despite this, performance was good with earnings, NAV and ROCE all up from their 2011 values. Good diversification of the portfolio and a strong balance sheet allowed such performance.
Figure 16 British Land Share Price History
(British Land, 2005-2015)
Figure 17 British Land Basic Earnings (per share)
(British Land 2005-2015)
4.4.1 British Land Findings
BL were hit hard by the recession with NAV falling 63.3% from 2007 to 2009 and such NAV growth proving steady, visible in figure 14. Despite this, ROCE remained strong over the 10-year term with good earnings showing a strong portfolio of rental income. Recovery performance from 2010 was slow but positive. Market dominance was demonstrated through confidence to invest in new developments in 2012 to provide new development completions in 2014/2015 to meet occupier demands.
2012 saw a limited effect of the uncertain market conditions, showing strong portfolio performance with asset values increasing therefore retaining investor confidence. Share price looked positive since 2013.
4.5 Case Study Comparisons
Overall, performance over the term is comparable for each study. Strong market performance paired with investor confidence caused share price to increase dramatically from 2005-2007. The recession hit hard causing poor performance for all through 2008-2009. Each raised capital through ‘Rights Issued’ in 2009, showing struggling conditions with decreasing portfolio valuations through the recession. 2010 saw steady recovery for all however the effects of market uncertainty in 2012 were greater for Hammerson and LS. All three companies invested in development opportunities in 2010 in order to meet the occupational and investor demand that 2013/14 brought.
Land Securities change between highest and lowest NAV over the term was 55.3% however NAV over the term saw an 18.2% increase. ROCE had the most dramatic drop in 2009 out of the three studies with basic earnings per share showing this.
Hammerson has shown the least volatile performance in NAV over the term with its lowest figure being in 2008 with growth shown in 2009. This is unlike both LS and BL where performance continued to drop through 2008 to a low in 2009. The international portfolio weighting has benefited Hammerson’s through difficult times benefiting from both UK and French markets.
British Land proved most volatile over the term. Change in NAV from highest to lowest has been -63% , but with long term change from 2005-2012 at only 6.7%. Nevertheless, strong 2012 performance saw no negative effects amidst uncertain market conditions and ROCE increased showing good performance unlike Hammerson’s and LS who both saw ROCE fall in 2012.
UK REIT anticipation following positive market growth clearly attracted increased investment, both national and international, as investor confidence grew around the regime. Dividend payments were strong following REIT conversion due to the 90% distribution requirement.
Performance was inevitably affected by the recession for each however it is clear that market awareness and active asset management, together with financial strength to react to changes, provides stability in performance in uncertain markets.
UK base rates were forecasted to increase in year 2013-2015, therefore affecting the financial performance of each. However, it is expected that changes will not occur until after 2017 following positive economic trends allowing further balance sheet strength to be achieved.
PRIMARY RESEARCH FINDINGS
This chapter consists of the results and analysis of primary research findings from questionnaires. Results provided the author with quantitative research data which was cross-analysed with secondary data found in the case studies.
The author composed a contact list of 60 ideally positioned professionals, 45 of which were REIT contacts with the remaining been investment agents and REIT specialists.
Questions 8 and 9 allowed for comments following the participants’ answers. Data is evaluated in this chapter.
5.2 Questionnaires Response Rate
A 45% response rate provided the author with 27 questionnaires. Quality of data is high due to the quality of respondents; 56.7% have been working within the property industry for 10 or more years ,14.8% for 5-9 years and 38.5% for 1-5 years. Figure 18 below shows the Question 2 results: participants’ length of involvement in UK REITs.
Figure 18 Question 2 Results
5.3 Analysis of Results
Question 3– Since their introduction in 2007, how would you rate their overall performance?
Answer and reply from Question 3 shows that 55.6% of respondents believe performance since 2007 to be average. This is unsurprising following the findings in section 4.4. showing little growth from 2005-2012. 25.9% thought performance to be above average or good, showing confidence in REITs and their ability to cope in weakening markets.
Figure 19 Question 3 Results
Question 4- Of the years listed below, which one do you expect to show the best performance for UK REITs?
It is unsurprising that 45% of respondents thought pre-REIT performance is the best. Early markets benefited from positive growth. High selection of ‘2013-2015’ shows future market confidence despite uncertainty recurring in 2012. Each case study showed strong performance through 2012, particularly British Land in section 4.4 with NAV growth, proving ability of REITs to adapt to conditions.
Question 5- The advantages of becoming a REIT far out weight the disadvantages. Do you agree with this statement?
81.5% agreeing is further evidence of REIT advantages as stated in section 2.1.4. Despite this, data collected though Chapter 4 shows few evidential signs of REIT benefits however the recession is the influencing factor of this. Tax efficiency is the main advantage of REITs, allowing increased investment and attracting shareholders. It is thought that these benefits will be evident as markets improve.
Figure 20 Question 5 Results
Question 6 focussed on future performance of REITs following changes introduced in the 2012 Finance Act which were considered in section 2.3. As noted in figure above, opinion is that the abolition of the 2% entry charge will prove most influential with little difference in the remaining changes. The entry charge was of little impact on the three case study companies due to financial strength and asset value. Results here show evidence that access to the regime will be easier.
Figure 21 Question 6 Results
Question 7- How successful do you think this will be over next 5 years?
63% weighting on ‘successful’ is evidence that changes were welcomed. These results also support future growth predictions, shown in section 2.4 and figure 4 where GDP is expected to increase, by showing confidence in REIT growth and performance potential.
Figure 22 Question 7 Results
Have the Finance Act 2012 affected you/ the business you work in?
Figure 23 Question 8 Results
Respondent 1suggeststhat more clients are considering adopting REIT status; suggesting that changes brought in are already having positive market effects showing potential for more UK REITs.
Respondent 2 suggests that early enthusiasm for REITs in 2007 caused positive results as shareholder interest increased. Such market position left companies vulnerable to the sudden economic crash. Reluctance of government to make changes to the regime is also stated as a factor that has caused affect with very little in the way of new entrants. It is hoped that the changes introduced in 2012 will “see new REITs emerging.
Two of the respondents suggest that changes have enabled greater flexibility and REITs are now able to invest in other REITs, therefore enabling ‘in house’ REITs to be created.
Question 9- Would you advise growing property companies to convert to REIT status?
Figure 24 Question 9 Results
71% of them suggest that growing companies should convert their companies into REIT status is evidence that REIT is welcomed.
Respondent 1: That depends on what their objectives are. Investment and development companies have different objectives and therefore may be appealing to different shareholders. For companies seeking income investors who want a tax efficient return it makes sense to look seriously at becoming a REIT. For development companies relying on one off significant transaction to generate income and growth it may be less advisable.
Respondent 2 thinks that if it’s a non-REIT structure and if it’s a private property company, there might be different reasons why a private company might not want to become a public company and then a REIT. It depends on the risk profile, the corporate mentality of that company
Respondent 3 suggests that there may be tax advantages to REIT structure, the status may not suit them, for every ten properties they’ve got they may want to redevelop nine of them. Some people the underlying business skill set and drivers may not comply with the advantages of being s REIT will.
The results demonstrate that REITs were hindered by poor economic performance upon REIT conversion and they were very rapidly affected by the recession. This is evident in opinions shown through questions 3 and 4 where REIT performance was considered to be ‘average’, with best performance levels thought to be before REIT conversion. This is not surprising following the evidence in chapter four where company performance was shown to drop dramatically in 2008/2009.
However, changes introduced in the 2012 Act have been welcomed with an anticipated future success of the regime suggested in question 7. Questions 8 and 9 provide valuable insight into professional opinion, the majority of which have welcomed the changes and look forward to growth as a result.
The aim of this study was to assess the performance of UK REITs following their introduction to the UK in 2007 and whether or not they are living up to their expectations to those who have converted. The study analysed a 9 years period (2007-2015 without considering BREXIT) of performance, taking data from before and after company REIT conversion through primary and secondary research.
The author found the study topical in view of the recent double dip recession from which the UK economy is now showing positive signs of recovery since 2013. Recent reforms introduced in the Finance Act 2012 together with the short life of UK REITs have further added to this subjective study.
Are UK REITs living up to their expectation? Has REIT status brought success to companies since their introduction in UK in 2007?
Review of secondary research suggested that UK REIT introduction was welcomed and would benefit investors with a tax efficient method of indirect property investment. Since the introduction of REITs into the UK in 2007 and changes to the regime in 2012, there are now over 50 UK REITs. A Real Estate Investment Trust offers investors an indirect alternative to the traditional method of investing in property directly.
Review of secondary data also illustrated the severity of the global recession. Poor performance of UK REITs was evident due to falling economic stability effecting investor confidence and restricting market activity. Clear correlation is recognisable with falls in GDP, the FTSE100, the IPD index and listed company share price. Weak REIT performance was therefore inevitable.
Evidence from case studies showed growth from 2005-2007 suggesting that investor confidence had been high. Strong market growth and economic activity were however a major influencing factor. Evidence presented suggests that speculation upon REIT introduction saw confidence in real estate investment increase. Share prices reflected this and comparison made with the FTSE highlighted the popularity of future REITs.
Data collected from case studies shows financial strength to develop, this was evident from the decision of each to undertake new developments in 2010. This saw investor interest increase following the international recognition of REITs and is illustrated in company share price.
Review of primary research shows confidence in the UK REIT regime and its future potential. This suggested that recent reforms in the 2012 Finance Act were welcomed with 63% of respondents expecting successful results over the next 5 years. Positive industry opinion is best shown through the comments of one respondent (Question 8)
Clearly the process takes time and is very sensitive to the state of the equity market – but recent real estate industry capital raisings, as well as improving share prices as against net asset value among the existing REITs are encouraging.
The purpose of this study was to prove or disprove the hypothesis that:
Real Estate Investment Trust status has brought success to companies that have joined the regime since their introduction to the UK in 2007.
Primary and secondary research found that UK REIT introduction had undoubtedly increased investor awareness with substantial growth heading into 2007. Case study research showed that difficult conditions through 2008-2009 were successfully assessed by REITs with changes to business strategy. Increased dividends from tax benefits of REITs improved investor confidence causing steady investment following the economic crash. Primary research shows professional opinion providing evidence to support confidence in the regime. Expectation of future performance is evident with reform in the Finance Act 2012 being welcomed by industry professionals
The author concludes that Real Estate Investment Trust status has brought success to companies that have joined the regime since their introduction to the UK in 2007 with the current positivity surrounding the UK industrial property investment market, combined with strong investor appetite for the industrial sector and the advantages REITs can offer.
6.4 Recommendations for Further Research into the UK REIT Market
Further research may provide an aspect for the scope for an increase in REITs across all UK property sectors to distinguish the expectations for the whole UK REIT market in the future.
A study of Brexit effects on the UK REIT Market is also recommended as it brings a lot of uncertainties to the market. In addition, further research into comparing the other leading nations’ REIT markets such as United States with the UK REIT market to see what similarities and differences there are in the way they operate would be recommended. This would provide a comparative study to further assess the benefits of UK REIT status.