By Marcus Phayre-Mudge, fund manager, TR Property
This article first appeared in Investment Week.
For the past five years, the UK listed property market has been reshaping itself. Smaller companies have merged or joined larger peers, others have returned capital to shareholders, and some have attracted buyers from private markets. Much of that consolidation was necessary and constructive. It has created larger, more liquid businesses, stripped out duplicated costs and, in the best cases, kept quality property accessible to everyday investors.
But the cumulative effect is now impossible to ignore. QuotedData calculated that the UK REIT universe has fallen from 82 companies five years ago to fewer than 40 today. That was palatable because the story was largely about clearing away the subscale end of the market. Investment Week’s readers do not need a rehash on why centralised wealth management propositions gravitate towards liquid, scalable holdings. The evidence of the sector’s thirst for scale keeps mounting, with the FCA’s August Wealth Management Survey showing that the UK’s ten largest wealth managers now look after 89 percent of discretionary clients (by number) compared with 70 percent in 2022, following a series of mega-mergers at the top end of the market.
But Prologis’s £14 billion acquisition of SEGRO changes the story for listed property. This was not a small REIT struggling to justify its independence, but the UK’s largest listed property company, a FTSE 100 constituent and, for many generalist investors, the obvious route into European logistics and listed property. Its departure raises a different question: when consolidation has done its job, what is left for wealth managers’ buy lists?
Shareholders could take Prologis paper and join a global platform with around $269 billion of assets under management, but that swaps focused UK and European exposure for a US-listed, dollar-denominated giant. The proposed London secondary listing helps access, but does not make it the same proposition. Or, investors can rebuild the exposure across smaller UK names. None is a like-for-like replacement.
It would be easy to conclude that shrinking supply reflects the shrinking relevance of listed property companies. I think the opposite is true.
Every economic age has required real estate, it simply asks different things of it. The industrial revolution needed factories, mass retail created shopping centres, ecommerce demanded logistics sheds, and AI is creating ravenous demand for data centres, land and electricity. Silicon Valley may write the software, but somebody still has to pour the concrete.
In every technological gold rush, investors initially stare at the prospectors. Eventually somebody notices who owns the road, the warehouse, and the electricity substation. JLL says live data centre capacity across Europe’s five largest hubs has reached 3.8GW, with another 1.4GW under construction. National Grid has just launched a north-west London upgrade enabling five new data centre connections. Even the supposedly “weightless” digital cloud economy keeps acquiring postcodes.
For wealth managers, property can still do a useful portfolio job. It offers exposure to real economic activity through assets whose income is ultimately supported by rent, alongside potential capital growth. In supply-constrained markets like much of the UK, rents can rise even when GDP is hardly setting off fireworks. For end clients, it is unusually tangible and understandable – somebody occupies a building, pays to use it, and that cash flow ultimately supports shareholder returns. We have explained to our own direct retail investors that TR Property is a way to “own the landlords” at a time many of them of staring at their own direct buy-to-let investments with increasing indifference, following years of regulatory and tax treatment crackdowns.
Listed property companies should, therefore, be enjoying a renaissance – but for the fact that UK investors and commentators still spend too much time worshipping at the altar of net asset value (NAV). NAV is useful, but it is a rear-view mirror metric. It tells us what valuers think a portfolio is worth based on prevailing yields and comparable transactions. But what matters more is whether rents are growing, lease events capture reversion, refinancing is affordable and, ultimately, that all this feeds through into earnings per share (EPS). SEGRO itself illustrates the point and its latest half-year results showed 5.3% like-for-like net rental income growth, underpinning 6.6% EPS growth, along with a strong data centre development pipeline. That is what investors should be pricing – not simply whether yesterday’s valuation makes today’s NAV look cheap, but whether occupiers will pay more tomorrow and management can convert that into growing earnings and dividends.
If assets valued at £100 generate a 5% income return while equity investors require 7%, the share price falls until the maths works. Calling the resulting gap a “discount to NAV” does not automatically make it a bargain. Conversely, a company that can compound rental income and earnings can deserve a tighter rating even if its starting NAV looks less exciting.
That is where the post-SEGRO debate should lead. Consolidation has largely done the demolition work and replenishment now matters. London does not need a miscellaneous collection of buildings floated because somebody wants an exit. New or enlarged property companies need a credible earnings engine based on supply-constrained sectors, visible rental growth, sensible leverage, proportionate costs, liquidity, and management that is aligned with shareholders. Retail warehousing, multi-let industrial, selected residential and power-adjacent assets all offer interesting raw material.
Listed property has spent five years clearing its condemned structures. The next job is construction. It is time somebody submitted a planning application, because the future may be digital – but its foundations are stubbornly physical.
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