Ediston Property (EPIC ), the £129m real estate investment trust focused on retail parks, has launched a strategic review after concluding it lacked the scale to deliver the best result for shareholders.

Chairman William Hill said the board’s preference was to merge with one or more Reits, but a sale of the company or its assets were also options if they delivered better value for shareholders.

The Reit’s shares shot up 12.7%, or 7.8p, to 69p, in early trading as analysts applauded Hill’s call for more consolidation in the fragmented property fund sector.

The spike briefly halved its 24% discount to net asset value at which they closed last night. However, as the UK stock market recovered after yesterday’s crash, the Reit’s stock cooled, settling back at 63.2p, up 3.2% or 2p, as speculation focused on which rival, if any, would take up EPIC’s gambit.

Hill said the board had been pleased with the ‘quality and resilience’ of EPIC’s property portfolio managed by Danny O’Neill and Calum Bruce (below) at Ediston Real Estate in Edinburgh.

Well placed but not growing

The monthly dividend payer, which yields a high but uncovered 8%, sold its remaining office and leisure assets after deciding to focus exclusively on out-of-town retail parks two years ago, leaving it with ‘well positioned’, he said, with cash to buy cheap properties in the downturn.

Nevertheless, with its relatively illiquid shares trading on a double-digit discount to NAV after last year’s surge in interest rates and gilt yields, he said the company was unlikely to raise new capital and grow beyond its existing 11 properties around the country in the short or medium term.

‘This is particularly disappointing given the opportunities which the board and manager anticipate may arise to acquire properties that could substantially enhance returns to shareholders over the medium term,’ Hill said.

Hill hoped EPIC’s move would start a much-needed debate over offering investors fewer, bigger and more liquid listed real estate funds. Despite last year’s big Reit merger between LXI and Secure Income, mergers have been relatively infrequent, which looks anomalous with the £20bn sector largely made up of heavily discounted funds under £300m.

‘The board believes that it is an important time for new capital to flow into the real estate sector,’ he said. ‘The state of markets clearly impacts the timing of when investors might wish to invest new capital, but even when conditions are optimal, the opportunity will be lost if there are other factors at play that inhibit those investment decisions being made.

‘However, it is in the gift of participants within the listed real estate sector to do something about this, and therefore a key element in the board’s decision to announce the strategic review,’ he concluded.

Where are the buyers?

Analysts have called for more mergers among Reits for some time. Numis Securities analyst Andew Rees said EPIC’s call could provide impetus for consolidation. However, he cautioned that private equity funds, which in the past would have been happy to take big property companies private, were struggling with increased finance costs after last year’s interest rate hikes.

‘Furthermore, potential deals can also be derailed by a disconnect between the entry price they are willing to pay and the boards’ expectations of a fair price, which is generally anchored around NAV,’ Rees said.

Columbia’s commanding position

Reit shares showed no major reaction to the news, though CT Property Trust (CTPT ) and Balanced Commercial Property Trust (BCPT ) dropped 4.6% and 2.2% respectively.

The £151m and £596m generalist Reits, which spread their portfolios across the key UK property sub-sectors, are both managed by Columbia Threadneedle, which owns 17% of EPIC, making it its largest shareholder, according to Refinitiv data. That could put the Reits in a good position for a two- or even three-way merger. According to Numis data, they are 18% and 12% invested in retail parks.  Their shares also trade on wide discounts of 32% and 28%.

Picton Property Income (PCTN ), a £390m Reit that has in the past expressed interest in acquiring another fund, eased 0.4% to 71.7p on a 28% discount

This year has seen an increase in corporate activity as investment company boards come to terms with the sector’s derating last year, the more difficult economic backdrop and professional investors’ reluctance to back small, illiquid funds lacking good performance record.