Two recent transactions involving a major US private equity firm suggest that the commercial real estate market is becoming increasingly attractive to UK investors, who are eager to capitalize on potential bargains.

This shift in investor sentiment can be attributed to evolving trends, such as the ‘hotel-ification’ of office spaces. This trend aims to provide a more comfortable and appealing work environment, diminishing the allure of working from home.

Additionally, there is a growing awareness that industrial properties, often overlooked, could offer substantial financial returns.

Blackstone, a prominent US private equity firm building a $100 billion property portfolio in the UK, has expressed interest in acquiring Big Yellow, the country’s largest self-storage company. Big Yellow, valued at £1.9 billion and recognized for its distinctive yellow facilities, is considered a leader in its field. The news of Blackstone’s potential bid sent Big Yellow’s shares soaring by 20%.

Andrew Saunders from Shore Capital highlights the significance of Blackstone’s involvement, noting that when a private equity firm becomes acquisitive, it often indicates that property valuations are low, presenting opportunities for enhanced returns. “It’s a sweet spot,” he says.

Saunders also points out that, in some instances, investors can acquire £1 worth of quality commercial property assets for as little as 50p, underscoring the appeal of the current market conditions.

Bullish: Hammerson’s portfolio encompasses Brent Cross and the Bullring in Birmingham (pictured above)

This is the result of the widening of the ‘discount’, or gap, between the share prices of some real estate investment trusts (Reits) and their net asset values (NAVs).

The cause of the slump in the shares were higher interest rates that made Reits a less attractive proposition and economic uncertainty. Yet, even against this background, Blackstone went shopping, snapping up Warehouse Reit in the summer.

As was also announced on Monday, the private equity group is now selling £1billion of warehouses to Tritax Big Box, in return for a 9 per cent stake in this £3.65billion Reit.

In Blackstone’s view, Tritax Big Box owns ‘high-quality properties with meaningful embedded rental growth potential’. But its shares are at a 25 per cent discount.

This reflects the despondency that has surrounded Reits, but also a degree of fear that the Budget could contain measures inimical to commercial property. If these materialise, Blackstone may walk away from Big Yellow.

But this apprehension means that Reits are not only themselves bargains, but can also find undervalued buys.

Laura Elkin, manager of the AEW UK Reit, said: ‘Political instability is producing mis-pricing right now. There are lots of attractively priced opportunities.’ Many private investors are looking to diversify.

If you feel this is the right time to make Reits a building block of your portfolio, this is how to lay some foundations.

SHELTER IN SHEDS

Blackstone may be keen on Big Yellow, which operates about 80 units in London and the South East.

But fund managers such as Matthew Norris of Gravis and Alan Dobbie of Rathbone, who are long-term backers of Big Yellow, are determined the business will not be sold on the cheap. A figure of £2.7billion is regarded as a reasonable valuation, given the credentials of Big Yellow’s chairman Nicholas Vetch and chief executive James Gibson.

Dobbie says the duo have built the business ‘painstakingly’ in the face of planning and other difficulties. Norris cites the pulling power of the Big Yellow brand. He adds: ‘Potential customers don’t Google self-storage, they Google Big Yellow.’

A bidding war for Big Yellow could loom, especially since brokers Peel Hunt think the US Reits CubeSmart and Extra Space Storage may be interested.

Even before this talk began, brokers rated Big Yellow a ‘buy’. The shares stand at 1118p, which implies a discount of about 25 per cent. One broker has set a target price of 1530p. Tritax Big Box is also rated a ‘buy’ at the current 145p. One broker has set a target of 200p. This reflects the reassessment of this Reit.

And, as this column highlighted last month, Tritax Big Box is moving into data centres – the edifices powering the artificial intelligence (AI) boom. If the Reit’s project on the Manor Farm site close to Heathrow gets the go-ahead, the Reit could earn £59m in rents every year.

Does Blackstone’s ambitions extend to the acquisition of the entirety of Tritax Big Box?

It’s always possible, but if you want exposure to this and other Reits including LondonMetric and Primary Health Properties, one option is the TM Gravis UK Listed Property fund, a FundCalibre best-buy.

AT HOME IN THE OFFICE

‘Hotel-ification’ is the buzzword in the London office market as demand for deluxe HQ accommodation in the West End outstrips supply. These workplaces boast five-star hotel-like decor, with swish furniture and well-stocked kitchens.

These extras – which help ensure that staff return to the office for four or five days-a-week – are not an extravagance.

Norris argues that ‘hotel-ification’ should be good news for such Reits as Derwent, Great Portland Estates and Shaftesbury Estate, which owns swathes of Covent Garden and Soho.

These Reits are also at deep-ish discounts. But this did not deter the £1.5 trillion Norwegian wealth fund from taking a large stake in Shaftesbury in March, hinting that these are good long-term bets for investors on a somewhat smaller budget.

The return to the office should also boost British Land, owner of the Broadgate complex in the City. If you are an existing holder, your patience could be rewarded.

TAKE RETAIL THERAPY

Such has been the attrition in the High Street that retail property has been plunged into what Saunders calls ‘a nuclear winter’. But there is a sense that the disruption caused by e-commerce is plateauing and shoppers are embracing the sociability and other aspects of physical stores.

The beneficiaries of this shift could include the £1.6billion Hammerson group, whose portfolio encompasses Brent Cross and the Bullring in Birmingham (pictured above). Hammerson is rated a ‘hold’ by analysts.

Another option is the £302m NewRiver Reit, which specialises in local shopping centres and is rated a ‘buy’. NewRiver has a 9.7 per cent dividend yield.

The £169m AEW Reit is similarly generous, with a 7.49 per cent yield. This Reit’s discount of just 0.6 per cent is thanks to a strategy of refurbishing tired retail parks and then selling them at a profit, as well as faith in a brighter future for the High Street.

One of AEW’s recent buoyant High Street buys is the Bancroft Parade of shops in the Hertfordshire commuter town of Hitchin.

Tenants include Gail’s, the bakery chain which acts as a catalyst for footfall in retail locations. Reits could have the same effect on your portfolio, so long as you are ready for political risk.

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