British Land, one of the UK’s biggest REITs with an overall portfolio valued at £11.2 billion ($14.21 billion; €9.90 billion), has been trading at a notable discount to its net asset value since the onset of the coronavirus crisis. As of June 1, the company traded at a 36 percent discount to its NAV of £6.40 per share.
Such a discount did not pass unnoticed by private real estate’s higher risk and return investment managers, as illustrated when Toronto-based sector giant Brookfield Asset Management acquired a 7 percent position for £264 million on May 28.
Brookfield’s investment has led market executives to ponder the possibility of a takeover of the London-based REIT at a later stage.
PERE heard how REIT buyers normally split into two categories: those looking to acquire a company’s underlying real estate and those looking to buy the full company. If Brookfield is to pursue a full takeover, which category it would fit into is currently a topic of debate.
Cedrik Lachance, global head of REIT research at London-based advisory and research firm Green Street Advisors, said, “What Brookfield is seeing here is a company trading at a big discount to its net asset value and [it] might have the ability to acquire the company at some discount to this asset value.”
Both the exposure and location of British Land’s office and retail portfolios in London, as well as its Canada Water mixed-use development scheme, would be of great appeal to Brookfield, according to Lachance.
However, the fact that British Land makes for a compelling investment proposition for Brookfield does not mean it is going to happen, warned the REIT specialist. “We think there is a 30 percent probability that Brookfield takes over British Land in an 18-month timeframe,” he added.
To make a first investment in a listed company, with the idea of pursuing a future takeover, would not be the best way to proceed, said Lachance. “The fact that people are now speculating on the subject would make the share price of British Land go higher and change the basis of discussions between the target company and the acquirer. It is better to be unseen in your original position.”
Nevertheless, Brookfield is no stranger to investing into the real estate via the public equities market. In its Q1 2020 shareholders letter, Brookfield reported it had deployed approximately $2 billion of capital into listed positions during the first quarter of the year, “including toehold positions in the shares of several companies that we feel, like ours, are being significantly undervalued in the current market environment.”
Brookfield and British Land declined to comment on the deal. However, Zachary Vaughan, managing director and head of Europe at Brookfield, told PERE: “We have somewhat shifted our focus to the public markets very selectively, executing positions in all our businesses – real estate, infrastructure, renewable power and private equity. In all cases, we look for high-quality assets that trade at a significant discount to their intrinsic value and where we can identify growth opportunities.“
It is unclear whether Brookfield has bought the stake to make profit from what it believes are underpriced shares, or if it is the prelude to a potential acquisition. However, if the takeover finally occurred, Brookfield would buy British Land at a takeout price of around £5.50 a share, according to Green Street Advisors’ predictions.
It would also bring some clarity to the pricings of retail and office sectors. “If the takeover were to be made, it would create a big price signal that could spur the public market to have a more positive view on the appropriate share price for other UK owners of office and/or retail properties.”
In its full-year results, British Land announced it had downgraded the value of its retail portfolio 26 percent to £3.9 billion. In contrast, the company said it had risen the value of its London office portfolio 2 percent to £6.8 billion.