Who will be the winners and losers from the Reit revival?

Look at the wide discounts that real estate investment trusts (Reit) trade on and you would be forgiven for assuming the property sector remains firmly out of favour. Yet the sector underwent an  unassuming rating revival last year that some analysts expect to continue into 2026 − although not all trusts will benefit as some remain takeover targets.

Trusts in the Association of Investment Companies’ Property – UK Commercial sector are trading 18.8% below their net asset values (NAV) on average, whilst those in the logistics sector are at a 17% discount, healthcare property investors at 18.2%, and residential investors on a hefty 36.9% discount.

But what the current discounts hide is the sharp rerating Reit shares enjoyed over 2025. Winterflood data shows the average discount of direct property trusts narrowed from 33% to 25% throughout the year, with ‘marked reratings seen at a number of vehicles that were subject to corporate activity’.

The heavy discounts reflect the negative total returns on the FTSE EPRA Nareit UK index, which declined 31% between the start of 2022 to the end of 2024 − the period in which interest rates rose.

However, the same index posted an 11% return last year, while the weighted average share price increase for property trusts that have been in existence over the entire period was 17%.

Emma Bird, head of research at Winterflood, said the turnaround was ‘driven by underlying property valuation increases, sustained or progressive dividend payments and a narrowing of discounts’.

The best performing property sub-sector over the year was retail, with Supermarket Income Reit (SUPR), Hammerson (HMSO), and Shaftesbury Capital (SHC) all posting ‘high-teens returns’, said Justin Bell, analyst at Deutsche Numis.

Self-storage also saw an uptick in sentiment thanks to a turnaround in occupancy trends ‘and helped in the fourth quarter by bid interest in Big Yellow from Blackstone, though it failed to come to fruition’.

On the downside, student accommodation witnessed a ‘significant derating’ due to stuttering occupancy and declining rental growth as overseas markets fell and the market was hit by oversupply.

Macro factors

Easing inflation, expectations for further interest rate cuts, and falling gilt yields are all contributing to the stability of the commercial property sector.

After three months of inflation stubbornly refusing to move, November finally bought some respite when the consumer price index (CPI) ticked down to 3.2%. Meanwhile, the Bank of England expects to hit its 2% interest rate target by mid-2026, rather than 2027 as it had previously expected.

This has lifted hopes for another rate cut this year, although the market is not yet pricing one in. However, the December rate cut to 3.75% marked a huge decline from the highs of 5.25% reach in August 2023, which persisted for a year. The latest cut has taken significant pressure off the debt-laden sector.

Borrowing costs have also been significantly reduced by falling gilt yields, making property more attractive to investors versus government bonds. The yield on the benchmark 10-year government gilt fell from 4.58% to 4.49% over 2025, and this year have continued to edged down to 4.4%.

Looking into 2026, Bird said there is ‘scope for a further re-rating of the property sector as improved investor sentiment should be supported by stabilising underlying valuations and the likelihood of further falls in interest rates and gilt yields’.

Columbia Threadneedle trust-picker and manager of TR Property (TRY), Marcus Phayre-Mudge, said easing base rates and tighter credit spreads would ‘directly support earnings and valuation’, supported by consolidation in the market.

‘Private capital remains highly engaged, and continued takeover activity helps anchor valuations and highlight the disconnect between public and private market pricing,’ he said.

He added that the ‘fiscal and regulatory environment is increasingly challenging for private landlords, which strengthens the relative appeal of listed real estate as a liquid, professionally managed and tax-efficient way to access property income for retail investors’.

‘If broader equity markets become more volatile, we expect investors to rotate back towards dependable income and asset-backed returns,’ Phayre-Mudge said.

Shrinking sector

Consolidation was a significant trend in 2025 and it doesn’t look like it will slow in 2026, with Picton Property Income (PCTN) becoming the latest trust to hoist the ‘for sale’ sign last week.

Despite flagging its intention to become a consolidator just a couple of years ago, it has been hampered by its steep discount, which prevented it from raising capital. Its inability to scale up means that it has become unattractive to all-important institutional shareholders, leading it to throw in the towel.

It is a story that has been repeated often across Reits, with the direct property losing four trusts last year due to mergers, takeovers by private equity, wind-downs, or listing transfers.

Bird said: ‘Another fund has since de-listed in the first days of 2026, and a further seven are due to disappear in due course.

‘This leaves only 11 UK-listed property investment trusts that can be considered ongoing vehicles, and a number of these could experience corporate activity in 2026, particularly if discounts remain pronounced.’

The benefit of this consolidation is not just a more liquid − and therefore more attractive − property trust sector, but ‘the prospect of continued corporate activity provides somewhat of a floor under share prices’, said Bird.

Phayre-Mudge has been a supporter of consolidation with the majority of transactions in 2025 involving companies with market caps of less than £500m, which makes them ‘simply too small to operate efficiently’.

‘Picton is just the latest example of an otherwise well-run business that has recognised it lacks the scale to stand alone,’ he said.

‘What remains now is a smaller group of better-capitalised companies operating at a more sustainable scale. In our view, the thinning-out is making the sector materially more investible for both institutional and retail investors.’

Who’s next?

This year will be marked by the ‘big getting bigger and the smaller Reits leaving the market’, said Bell.

‘It feels inevitable that we will see more boards forced to take action to address the ongoing disconnect between share price and asset values,’ he said.

As well as PCTN’s move, Bell said Schorder Real Estate (SREI) and Value & Index Property (VIP) are ‘obvious calls’ for consolidation given serial-acquirer LondonMetric Property (LMP) has already declared stake in the funds of 11% and 9%, respectively.

Bell also flagged Target Healthcare Reit (THRL), which could follow in the footsteps of peer Care Reit. It was taken out by a US rival last year.

Bell said THRL is ‘on the radar’ given its ‘high-quality portfolio of decent scale’.

‘I would expect it to achieve a price, if sold, much closer to NAV Than the 9% discount Care Reit went for’,’ he said.

‘It also remains the largest externally managed Reit below the £1bn mark and it has so far resisted the trend of aligning fees to market cap.’

Bell is predicting the pace of M&A seen in recent years will slow given there are now fewer targets on the London market.

‘Will 2026 be the last year perhaps of this significant M&A trend in the UK market? It feel like much of the clean-up work has been done and those remaining will have earned their place and with a fair wind be in position for growth,’ he said.

Phayre-Mudge believes best-in-class assets, strong balance sheets, and aligned management will ‘continue to differentiate winners from laggards’ this year.

He noted the low vacancy rates and stable cashflows of retail warehouses and shopping centres, and the attractions of healthcare property ‘driven by long-term demographic demand and government-backed or highly defensive income streams’.

‘Logistics and industrial assets should also benefit as new supply continues to slow and demand stabilises, while prime residential remains supported by chronic housing shortages in many major markets,’ he added.