The number of listed REITs has shrunk amid a trend of consolidation in recent years, driven by a difficult market environment that has left many trading at significant discounts to net asset value (NAV).

Size matters: investors favour larger REITs such as industrial and logistics giant SEGRO

Volatile conditions, alongside higher interest rates and inflation, have made it harder for REITs to raise capital and grow.

Being acquired by a larger REIT or taken private can provide access to greater capital and liquidity. Notable examples include Primary Health Properties’ £1.79bn cash-and-shares acquisition last June of Assura, and Blackstone’s £489m cash acquisition of Warehouse REIT in September.

Meanwhile, LondonMetric, which has a £7bn portfolio, has teamed up with Schroder REIT to table a £403m, all-share bid for Picton Property Income, which remains ongoing. This activity raises a question: where does this leave smaller REITs and property companies?

Generally, REITs below £1bn market cap face the greatest liquidity pressures. Analysts say many are caught in a vicious cycle of low liquidity that deters investors, while weak valuations hinder equity issuance and limited capital access constrains growth.

According to Edward Ziff, chief executive and chair of London-listed Town Centre Securities (TCS), a widening divide is emerging in listed property, dictated by scale. For Ziff, the “single biggest frustration is the lack of interest from institutional investors”.

He adds: “We’ve got a good stock of income-producing properties and development opportunities. But for those of us who are smaller, demanding interest from the investment world, other than retail-style investors, is bordering on impossible.

“Another frustration is our share price trading at a discount to asset value. That doesn’t directly affect operations, but it does impact perception and strategic flexibility.”

The biggest frustration is the lack of interest from institutional investors
Edward Ziff, Town Centre Securities

Picton is another smaller REIT facing these pressures. In February, its portfolio of industrial, office, retail and leisure assets was valued at £699.1m. It launched a review exploring options including a merger or sale, despite being financially and operationally strong.

“One frustration [for Picton] was the difficulty attracting new shareholders to invest, which was partly due to liquidity issues, as it is harder to build a meaningful position with smaller companies,” says Andrew Saunders, equity analyst at Shore Capital Markets.

According to analysts, the pressures facing smaller REITs are becoming increasingly structural rather than cyclical. Oli Creasey, head of property research at Quilter Cheviot, says scale, management structure and asset quality now define which listed property companies remain investable or attractive takeover targets. “When you filter by size, simplicity and asset appeal, the list becomes quite short,” he says.

At one end of the spectrum, some REITs are now too large to be digestible except by major private equity firms. At the other, some are simply too small to justify acquisition interest.

Management structures also matter. Internally managed REITs, for example, can become harder to acquire because buyers must absorb employees and operational platforms, rather than simply terminating an external management contract.

Shift away from specialists

Creasey also notes that investor sentiment has shifted back towards larger, diversified property companies after years of enthusiasm for specialist ‘alternative’ sectors such as healthcare, supermarkets and student housing.

“There was a period where investors wanted highly specialised exposure. Now, mainstream sectors are back in favour, which has reduced interest in smaller, specialist REITs,” he says.

That changing sentiment has benefited big, diversified landlords such as British Land and Landsec, both of which have regained investor attention despite trading at discounts to NAV for much of the past decade.

“Property valuations may be broadly correct,” Creasey says. “But the type of investor buying physical assets is different from someone buying REIT shares.”

One difference is that direct property investors will often accept lower returns in exchange for income stability, while equity investors increasingly compare REITs against higher-growth alternatives such as technology stocks. “As a result, a 6% dividend yield alone may no longer be enough,” Creasey says.

US REITs don’t revalue portfolios as often, so net asset value isn’t central
Andrew Saunders, Shore Capital Markets

Scale brings REITs several advantages, including improved liquidity, greater analyst coverage, stronger access to debt and equity markets, and inclusion in major indices that attract passive investment flows.

Liquidity is also a key differentiator. Investors favour big REITs such as SEGRO due to deeper trading volumes, stronger coverage and easier entry and exit; whereas with smaller REITs, “poor liquidity means you can lose margin just trading in and out”, Saunders says.

The sector is also rethinking how to value REITs. While UK investors have traditionally focused on NAV, some argue that income and earnings are becoming more important – as they are in the US. Saunders notes: “One major difference is US REITs don’t revalue portfolios as often, so NAV isn’t central. Investors focus on earnings and dividends.”

This has implications for capital raising. In the UK, issuing equity below NAV has been seen as value destructive, but Saunders suggests attitudes may be shifting.

Recent equity raisings by Great Portland Estates and NewRiver gained shareholder backing despite discounts to book value, as they were expected to enhance earnings and dividends.

“I’m optimistic we may start to move away from the obsession with price-to-book value and view REITs in a way in which they were designed: to be distribution of income through real estate,” Saunders says.

Against this backdrop, companies are changing their strategies. One example is TCS, which owns more than 2.5m sq ft of prime UK commercial, residential, car parking, office, leisure and retail assets, and has a pipeline of schemes with an estimated gross development value of over £400m.

TCS left the REIT regime in 2023 after it cut its borrowings, sold assets and carried out asset management initiatives, lowering risk and strengthening its balance sheet, rather than accelerating expansion. It was able to leave the REIT regime via a share buy-back representing around 13% of its issued share capital.

TCS remains operationally diversified but pursues development cautiously. “It’s not just whether you can build; it’s whether the product stacks up,” Ziff says. “Lease lengths, tenant breaks and demand all matter.”

Small REITs still have a role

Despite the pressures on smaller REITs, many believe they still have a role to play. Stocks that receive less market attention can sometimes be mispriced, offering opportunities for investors that are comfortable with lower liquidity.

Ziff says being acquired by a larger REIT “works for institutionally managed businesses”, but adds: “TCS is different.

Around two thirds of the company is owned by the Ziff family and associated parties.

We’re managing our own capital, not just other people’s.

“We take that responsibility seriously. We feel it is really important that we manage it ourselves. We wouldn’t simply hand it over to someone else – even if they’re very capable. Our private investors are aligned with that philosophy.”

Saunders adds: “There will always be a place for smaller REITs if they offer something different and give investors a unique opportunity to access an asset class or category of real estate that you can’t find elsewhere. The door should always be open.”

For now, however, many smaller listed landlords remain trapped in an uncomfortable paradox: they are operationally sound businesses constrained less by the quality of their assets than by market dynamics beyond their control.