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Shed envy is purportedly a cause of many neighbourly disputes across Britain. That must make Segro the talk of the town then. The £12bn listed warehouse reit is broadening its roof with an all-share offer for Tritax EuroBox that values the smaller owner at just over £550mn.
Starwood also did its bit in the roll-up of UK property minnows on Wednesday with a cash offer for Balanced Commercial Property Trust of £674mn for the mixed-use portfolio. Price tags reflecting large discounts to net asset value in both deals underline the market’s apathy for smaller operators.
The situations at Segro and EuroBox could not be more different. The bigger group is the owner of Europe’s largest data centre cluster — in Slough outside of London — putting it squarely in the hottest subsector in town. Segro raised almost £900mn in new equity earlier this year for a decade-long buildout that includes up to 24 new data centres. EuroBox, meanwhile, which owns logistics properties on the continent, has struggled with outsized costs and an inability to raise money for growth.
That is partly down to the geographical spread of its portfolio: just under half is in Germany, about a tenth is in Spain and the rest is over five other countries. That means costlier external property management. Segro will do away with this and integrate the properties into its existing portfolios in those respective locations.
Higher financing costs are also biting. EuroBox faced refinancing existing cheap debt at higher market rates, notes Denese Newton at Stifel. The fund has been selling assets in order to get debts down from an outsized loan to value ratio of 45 per cent in March this year.
Those problems are reflected in the price. Even with the 27 per cent premium to the undisturbed share price that Segro is offering, it is a 14 per cent discount to the most recently reported net asset value. The offer for BCPT is priced at 10 per cent discount to its latest NAV.
Both of these cases illustrate the problems that real estate investment trusts can run into given the legal obligation to return most earnings to shareholders. That means capital for growth or debt reduction must come from new equity — an impossibility when shares trade at seemingly permanent discounts. Other small reits in the same boat are vulnerable to cut-price offers from better-regarded rivals.
