Recent bids for real estate investment trusts (Reits) at more than 40% premiums to prevailing share prices should have been a much-needed shot in the arm for the sector and triggered a re-rating.

This has not come to pass, however, and has left me scratching my head as too why. In April, Industrials Reit (MLI) was the subject of a take-private bid by US private equity giant Blackstone valuing it at £511m and a 42% premium to its share price.

Then last week, Civitas Social Housing (CSH ) announced it had agreed to an offer from CK Assets valuing it at £485m at a hefty 44% premium to its share price. Unlike with the Industrials Reit offer, however, the bid price of 80p per share was a substantial 26.7% discount to its net asset value (NAV). This may reflect the challenges facing the social housing sector, but in our view undervalues the company’s medium and long-term prospects.

In any event, the bid prices do show the extent of the depressed values that shareholders are placing on the real estate sector. They have done little to change investor sentiment towards property, it seems, and at these levels there is no doubt that private equity companies will continue to be on the prowl (as was the case with Industrials) and more opportunistic bids will be attracted (as with Civitas).

One would have expected the bid for Civitas to have resulted in a similar bounce in the share price of its closest peer Triple Point Social Housing (SOHO ). Although it was up around 20% in the days after the bid, Triple Point’s share price still lags NAV by 56%. It doesn’t really make sense when a bid for a comparable company has come in at a 27% discount to NAV, although Triple Point has yet to announce its 31 March valuation.

It does beg the question what will trigger a re-rating of Reits? Interest rates went up another 0.25% last week to tackle stubborn inflation, but there are positive signs that inflation has peaked and will fall quite quickly over the remainder of this year. This would be good news for the plateauing and eventually a fall in the base rate.

Values seem to have stabilised in the sector from the rout that took place at the end of last year as investment yields kept pace with interest rates. MSCI data shows that capital values returned to positive territory in March for the first time in eight months, which was mirrored in the NAV updates by a number of Reits.

The substantial valuation correction and (relatively) short price discovery period has meant transaction volumes have picked up in the market at prices at or even above book value. This should give investors’ confidence in values.

However, with Reits and listed property companies looking so cheap, a lot of them will be the target of private equity and opportunistic bidding. This will certainly be the case for companies focused on sectors with robust fundamentals, rental growth prospects and strong management teams as was the case with Industrials.

Urban Logistics (SHED ) certainly fits this bill trading on a discount to its last published NAV of 27%. It operates in the urban ‘last-mile’ sub-sector where the supply/demand dynamics are acute. A large proportion of UK industrial and logistics lettings are in the ‘mid-box’ category (between 100,000 and 300,000 sq ft), where Urban Logistics Reit is focused, while constraints on supply are severe.

The nature of urban logistics, being located close to large towns and cities, make gaining planning for this use class very difficult. In addition, build costs have been rising sharply, as well as the cost of land, resulting in the cost of building an urban logistics scheme exceeding the current values of a built property.

This supply-demand tension often triggers rental growth. In the first three months of this year Urban Logistics Reit completed 15 new lettings and regears across its portfolio, with a like-for-like rental uplift of 24% for new lettings and 5% for regears. This, together with the management team’s razor-sharp focus on growing rents and adding value through asset management, makes the company’s discount to NAV attractive for circling private equity.

We could also see some mergers of some of the Reits. Last year LXi (LXI ) merged with Secure Income to create a £2.8bn company, and on the smaller end Custodian Property Income (CREI ) swallowed Drum Income Plus.

Most of the so-called generalist trusts are small and have similar assets and portfolio weightings as well as investment strategies, so it would make sense for a coming together to create larger, more cost-efficient funds.

In March, the board of Ediston Property (EPIC ), which owns retail parks, launched a strategic review of the company having become fed up with its persistent discount. It said its preferred option was a merger with one or more Reits, but a sale of the business was still an option.

With wide discounts prevailing and private equity circling, further consolidation in the property sector is certainly on the cards.

Richard Williams is a property analyst at QuotedData. James Carthew is away.

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