Picton Property Income (PCTN) has become the latest real estate investment trust (Reit) to hoist the ‘for sale’ sign as it admits its small size and large discount is holding it back.

The £528m trust, which just a few years ago set its stall out as a potential bidder for its property peers, has started a strategic review and formal sales process.

It is considering a merger with other UK Reits or the sale of the entire portfolio, which is heavily weighted towards industrials following a makeover that saw it slash office exposure to push into industrial and retail warehousing.

Francis Salway, chair of Picton, said the aim of the strategic review was to ‘maximise value for our shareholders’. 

The trust’s net asset value is down 2.4% since launching in 2005, with the share price falling an even steeper 23.7% over the twenty-year period.

Performance did improve in the near-term, with shares rising 29.8% over the past 12 months, though it barely broke even over the past five years with an overall loss of 0.3%.

Given these underwhelming long-term returns, Salway noted that the trust trades on a ‘material discount’ of around 23.7%.

The discount has been stubborn despite the trust buying back £24.7m worth of shares last year, which Salway said ‘doesn’t fully reflect the underlying quality and performance of the business’.

Half-year results to the end of September delivered a NAV return of 3.4% versus a 2.7% increase in the MSCI UK Quarterly Property index.

The ‘persistent valuation disconnect’ has been felt across the Reit sector and has led to a ‘significant reduction in the number of UK Reits, primarily driven by mergers and take-private transactions’.

While PCTN had planned to scale up its portfolio, the discounted sector made it impossible to raise cash, leaving the trust at a size that is not attractive to institutional investors.

‘The company has successfully attracted new investor interest to widen its shareholder register and has strong shareholder support, however the board recognises that the landscape of its investor base is evolving,’ Salway said.

‘As institutional investors have consolidated, their capital has increasingly been allocated to larger investment vehicles which provide economies of scale and address their own liquidity requirements and exposure limits.’

Although the size of a trust does not determine its performance or discount, Salway added that PCTN’s current size ‘may no longer be optimal as a standalone listed entity’.

Since the fund became self-managed in 2012, the total shareholder return has topped 307%, and the shares have beaten the FTSE EPRA Nareit UK index over one, three and five years.

Over the past 20 years, the company is ranked seven out of the 70 property portfolios in the MSCI UK Quarterly Property index.

Peel Hunt analyst Matthew Saperia said PCTN has ‘found itself stuck between a rock and a hard’ as the sector consolidates and the strategic review is ‘no surprise’.

‘The path from here will likely hinge on the appetite for the assets and the market’s appraisal of their value,’ he added.

‘There is likely to be interest from a range of parties, including private equity and Reits. The latter will, of course, be premised on the ability to deliver return accretion for both sets of shareholders.’