TR Property (TRY ) fund manager Marcus Phayre-Mudge says consolidation in the wealth management sector (as illustrated by this month’s merger agreement between Rathbones and Investec) will prompt real estate investment trusts (Reit) to join forces.

Phayre-Mudge highlighted that wealth firms often dominate Reits’ shareholder registers, adding that larger Reits above £500m are less of a headache to include on their ‘buy’ lists.

Essentially, big wealth managers want big investment companies to invest in, creating pressure for London’s fragmented Reit sector to coalesce into a smaller band of large funds.

‘[Wealth firms] certainly won’t stand in the way of consolidation,’ said Phayre-Mudge whose £949m property equities trust is the sixth-biggest of 39 property funds listed on the London Stock Exchange.

Reits held by wealth managers

According to Refinitiv data, there are four Reits with market values under £500m where Investec and other wealth managers have prominent stakes and could influence whether or not they seek a merger.

They include the £450m Warehouse Reit (WHR ), in which wealth managers own 34%, which if combined with the £651m Urban Logistics (SHED ) could create a bigger competitor to the £2.8bn Tritax Big Box (BBOX ).

Shares in the other three trade on wide discounts to net asset value (NAV), holding out the prospect of a re-rating if they combined with a rival to create a more scalable and liquid fund.

Picton Property Income (PCTN ), for example, is 23% held by wealth managers. Its £549m portfolio has a market value of only £415m due to the 24% discount on its shares. 

Similarly, Schroder European Real Estate (SERE ) falls some distance below the £500m threshold. With 15% of its shares owned by wealth managers, it could see its market value swell to £158m from £11m if the 30% discount could be eradicated by a combination of a merger and improved sentiment to commercial property.

More than a fifth of Civitas Social Housing (CSH ) is in wealth manager hands. By rights, its £675m portfolio should be well above the £500m hurdle were it not for the painful 48% discount that reduces its market capitalisation to £342m.

The low rating reflects the regulatory scrutiny of the housing associations that are its main tenants. This scrutiny has cast a shadow over the long-term sustainability of its rental income, and that of rival Triple Point (SOHO ). A merger wouldn’t resolve this problem on its own.

Not a BH Global situation

The Rathbones and Investec deal has already caused issues for trusts outside of the property sector.

Following the merger, the enlarged group will have a stake of more than a third in Brevan Howard’s popular BH Macro (BHMG ) hedge fund.

The combination of two of the UK’s biggest investors in investment trusts means the group will have 35.4% of the voting rights in the £1.3bn London-listed investment company.

This was well above the 30% threshold where Takeover Panel rules would normally require a bid to be made.

The panel will waive that requirement in the case of a merger, but it will restrict Rathbones and Investec from buying further shares in the trust.

Phayre-Mudge (below) said that the situation for small Reits is not quite as pressing. ‘This is not a BH Global situation, and there’s no need for wealth managers to make bids for Reits,’ he said.

‘Turkeys don’t vote for Christmas’

Phayre-Mudge, whose team also run the £353m CT Property Growth & Income fund, was somewhat critical of Reits, suggesting property companies were ‘poor at changing management’, with an average tenure of nine years.

The fund manager said that although smaller property trusts will benefit from economies of scale by merging with one another, there could be some pushback from incumbent managers.

‘Reits need to act for shareholders, not management. But turkeys don’t vote for Christmas,’ he said.

Phayre-Mudge applauded Ediston Property (EPIC ) for its openness about the challenges it faced as a smaller Reit and its wish to find a merger partner.

‘It was realistic in saying that it would be hard to attract investment with its market cap well below £250m,’ he said.

Ediston’s chairman William Hill said last month that the board’s preference was to merge with one or more other Reits, but a sale of the company or its assets is also an option if it delivered better value for shareholders.

Industrials sale ‘bittersweet’

Blackstone’s bid for Industrials Reit (MLI) at the start of April benefited TR Property, with the trust owning 12% of the investment company prior to the deal announcement, according to Phayre-Mudge.

The manager said that the purchase by the US private equity giant was ‘bittersweet’.

‘We wanted MLI to grow, but we’ve been somewhat vindicated by the Blackstone buy,’ he said.

The fund manager noted that private capital was dominating the commercial real estate space and that the listed component of the sector in the UK was fairly small.

‘The listed market is not appreciating property’s value, that’s why Blackstone is taking advantage,’ Phayre-Mudge said.

He went on to argue that property should continue to exist within listed vehicles. The fund manager noted that private equity was not immune from having issues in the asset class, citing Blackstone’s gating of its BREIT fund in December.