At last! The Bank of England’s first cut in interest rates has finally come, marked by a collective sigh of relief for many downtrodden sectors such as property.

It may be just a 0.25% cut and a succession of quickfire cuts seem highly unlikely, but it signals a turning point that should bring confidence to investors that values have hit their nadir point.

Extreme negative sentiment towards the sector had seen the share price of many real estate investment trusts (REITs) languish on wide discounts to the already beaten down net asset values (NAVs). It appears preposterous that REITs can continue to trade on such wide discounts now.

NAVs had been stabilising across real estate sectors over the past six months (with a small number reporting NAV growth). With property investment markets set to open up and transaction levels returning in earnest, valuation uplifts should follow.

Every property sub-sectors will feel the benefit of lower interest rates, but those that were hit hardest in 2022 when interest rates ballooned are in the greatest shape to stage a recovery.

The industrial and logistics sector suffered most, with values falling 26% in the second half of 2022 alone (the steepest fall for the sector on record according to the MSCI). Property yields in the sector moved out 120 basis points (bps – equivalent of 1.2%), while the prime segment retreated 175 bps, from 3.25% to 5%, in just five months at the end of 2022.

That has since settled at around 5.25% to 5.5%, giving a spread over the UK five-year gilt that had floated in the 4% and 5% region for much of the last 12 months. However, with five-year gilts marching down towards 3.5%, yield compression is expected to follow.

Add to this supply and demand fundamentals remaining positive in the sector, investment levels are predicted to grow. Investors had already started to return to the market, buoyed by rental growth prospects and the reversionary yield on offer.

According to Savills, investment volumes in the first half of 2024 was 41% up on the same period last year (perhaps unsurprisingly) but also up on pre-COVID levels. With long-term debt costs trending downwards, volumes are certain to grow further.

That is good news for the listed REITs focused on the sector. The three companies in the AIC Property – UK Logistics peer group are trading on discounts to NAV ranging between 7.9% and 30.5%.

The largest by some distance is Tritax Big Box REIT, which has a market cap of around £4.1bn following its acquisition of UK Commercial Property REIT (UKCM) earlier this year. Trading on the tightest discount to NAV among the peer group, the company has recently expanded its investment horizon to include smaller, urban assets in its portfolio.

This was part of the rationale in buying UKCM, which held a vast portfolio of urban logistics assets. It also owned a number of office, retail and alternative property assets, worth around £475m, which the manager of Big Box will sell off over the short term.

The timing could be perfect, selling into an improving investment market. The proceeds will be used to fund its expansive development pipeline where it expects to achieve returns on cost of 7%.

The £590m market cap trust Urban Logistics REIT trades on a 21.4% discount to NAV, and is focused on boosting its earnings to cover its dividend, which currently yields 6.1%.

Dividend cover is running at around 90% and the managers say that they are confident that letting up vacant space within its portfolio will bring about full coverage, which we covered in our results analysis note.

Net rental income has continued to grow nicely, reflecting the severe supply-demand imbalance in the urban logistics sub-sector. However, higher interest costs on its debt hit earnings. Lower forward rates would be well received, especially given that it has a refinancing event in August 2025.

The final trust in the sector, Warehouse REIT, is trading on a discount to NAV of 30.5%. It is focused more on the multi-let industrial sub-sector, which has similar supply-demand dynamics but is more asset management intensive due to the larger number of tenants.

Earlier this year it announced a deal to buy a retail park, in a move away from its core focus. It argues that retail parks share common supply-demand characteristics as multi-let industrial but are trading at wider yields. If, as expected, those yields now come in that deal could be well timed.

While we believe the industrial and logistics sector is set to benefit most from lower interest rates (having been hardest hit when they went up), the impact will be positive across the real estate sector. Although rate cuts have been on the cards for some time, the first cut feels like a significant milestone.