WEBVTT - The UK's Shrinking REITs Sector Is Still Attracting Buyers  

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<v Speaker 1>Bloomberg Audio Studios, Podcasts, radio news. Welcome to Merton Talks

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<v Speaker 1>Your Money, the personal finance edition of MERN Talks Money,

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<v Speaker 1>and these bonus podcasts we talk about best strategies for

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<v Speaker 1>making the most of your money. I'm join Stepwick, senior

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<v Speaker 1>reporter for Bloomberg and author of the award winning Money

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<v Speaker 1>Distilled newsletter. Mern's out today, but join me in the studio.

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<v Speaker 1>Very kindly is Jack Siddars, who is Bloomberg's team leader

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<v Speaker 1>covering real estate and European investing. Jack, thanks very much

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<v Speaker 1>for joining us today.

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<v Speaker 2>Thanks very much for having me.

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<v Speaker 1>So, just to give you an idea of what we're

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<v Speaker 1>going to cover, We're going to talk about what is

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<v Speaker 1>a rate a real estate investment trust. We're going to

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<v Speaker 1>run through an overview of what's been a hectic five

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<v Speaker 1>years for the sector in which it's basically halved in

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<v Speaker 1>terms of the number of that are on the UK

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<v Speaker 1>stock market. Then we're going to talk about a particularly

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<v Speaker 1>a big deal that's going on in the reat sector.

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<v Speaker 1>The biggest UK listed has been targeted by a US

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<v Speaker 1>peer Jake's been doing before and very Keenley kind of

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<v Speaker 1>talked us about real estate investment trust. But just for

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<v Speaker 1>listeners who are are new to the show, perhaps a

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<v Speaker 1>quickly means that what is a real estate investment trust?

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<v Speaker 2>Jack? Yeah, sure, thanks so well. Real estate investment trusts,

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<v Speaker 2>or routs as they're commonly known, are basically publicly traded landlords.

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<v Speaker 2>The ret regime came in just just after the global

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<v Speaker 2>financial crisis about about twenty years ago. And the idea

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<v Speaker 2>is that so, unlike a conventional listed landlord that can

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<v Speaker 2>kind of do whatever it likes with the money it makes,

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<v Speaker 2>a distributes the vast majority of its earnings in the

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<v Speaker 2>form of dividends to shareholders. So mostly it owns investment properties,

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<v Speaker 2>properties that are rented out to companies that generate a rent,

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<v Speaker 2>and it pays those rents out in the form of

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<v Speaker 2>dividends showers. But they'll also do most of them will

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<v Speaker 2>do a little bit of developments. They have a development

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<v Speaker 2>portfolio as well, and that might be where they make

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<v Speaker 2>their sort of development profits from building buildings of renting

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<v Speaker 2>them out and then selling them on.

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<v Speaker 1>Yeah cool. So yes, it's all about getting the rent

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<v Speaker 1>and paying the devidanzo and they get various tax kind

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<v Speaker 1>of conversation.

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<v Speaker 2>Yeah, the tax is key, I should should have so Yeah,

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<v Speaker 2>so that it's it's a sort of tax advantage structure,

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<v Speaker 2>so that you're not paying kind of double taxation. So

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<v Speaker 2>they have some exceptions that the other landlords don't don't

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<v Speaker 2>benefit from.

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<v Speaker 1>Obviously, it's been an absolutely wild five years for most

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<v Speaker 1>kind of investments. But obviously with things like COVID and

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<v Speaker 1>the pandemic and working from home and the impact on

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<v Speaker 1>office buildings and otherstic it's always through was harmed in

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<v Speaker 1>the sector over the last five years because as I

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<v Speaker 1>understand it will certainly haven't. I've seen various statistics. They

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<v Speaker 1>see that roughly ety oil and reaps and the uklist

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<v Speaker 1>did a bit five years ago and knew that it's

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<v Speaker 1>going on that we don't have about forty perhaps even

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<v Speaker 1>slightly at this you're talks through way that's harmed or

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<v Speaker 1>who that has come about.

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<v Speaker 2>Yeah, of course with it, and there's there's a lot

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<v Speaker 2>to unpack there. If we start just talking about real

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<v Speaker 2>estate commercial real estate very broadly, and then we can

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<v Speaker 2>talk about the particular issues that have impacted the listed

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<v Speaker 2>part of it in the resector in particular. But for

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<v Speaker 2>real estate, I guess probably the most important thing fundamentally

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<v Speaker 2>is interest rates and bond yilds. So if interest rates

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<v Speaker 2>in a time when interest rates were very very low

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<v Speaker 2>and therefore bond yields are very very low, real estate

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<v Speaker 2>was seen as quite an attractive alternative in which to

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<v Speaker 2>allok capital because it was throwing off a bit more yield. So,

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<v Speaker 2>even though yields got sort of squeezed lower and lower

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<v Speaker 2>and lower, and therefore real estate values pushed up higher

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<v Speaker 2>and higher and higher, it was still offering a kind

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<v Speaker 2>of premium over risk free rates, over government debt, over

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<v Speaker 2>corporate debt as well. Now, come twenty twenty two, the

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<v Speaker 2>sort of end of the cheap money era, risk free

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<v Speaker 2>rates blow out, interest rates go up, bond yields go up,

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<v Speaker 2>all of a sudden. Real estate values had to adjust

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<v Speaker 2>to reflect that reality, because why are you going to

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<v Speaker 2>buy an a liquid building that is yielding less than

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<v Speaker 2>a basically risk free government bond. You're not, so that

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<v Speaker 2>the value has to go down. The yield on the

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<v Speaker 2>property has to go up in order to make it attractive.

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<v Speaker 2>So that is the single most kind of important thing

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<v Speaker 2>that has happened to commercial real estate as a whole

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<v Speaker 2>over the last five years. Now you mentioned there's then

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<v Speaker 2>been a whole bunch of other different sort of structural

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<v Speaker 2>issues within the different types of commercial real estate that

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<v Speaker 2>have also had a huge impact. So we had COVID

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<v Speaker 2>impact on offices or bit that, you know, maybe a

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<v Speaker 2>lot of that was more sentiment than reality. We've had

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<v Speaker 2>the rise of online retail and how that's affected the

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<v Speaker 2>shopping center or conversely, how that's affected the warehouse, so

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<v Speaker 2>very simply generally speaking, bad for shopping centers, good for warehouses.

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<v Speaker 2>So those sorts of factors are at play as well,

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<v Speaker 2>but then for the reach sector in particular, so publicly

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<v Speaker 2>traded real estate, and it's a funny kind of asset

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<v Speaker 2>class because in theory it sort of should trade like

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<v Speaker 2>any kind of commercial property, but the reality is these

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<v Speaker 2>are publicly traded stocks and therefore their subject to kind

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<v Speaker 2>of equity market volatility. So you mentioned that there were

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<v Speaker 2>dozens and dozens and dozens of uk uts, but lots

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<v Speaker 2>of them were quite small. And one of the problems

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<v Speaker 2>is it sort of doesn't necessarily take a much bigger

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<v Speaker 2>team to run a publicly traded landlord that has one

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<v Speaker 2>hundred billion in assets than it does one that has

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<v Speaker 2>one billion in assets. So what that means is small

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<v Speaker 2>routes are quite expensive to run, which is not great

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<v Speaker 2>for sheld. You've also then had the many and well

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<v Speaker 2>documented issues with the UK market and the sort of

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<v Speaker 2>general lack of liquidity in the UK market and UK

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<v Speaker 2>assets generally trading at a discount. So all of these

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<v Speaker 2>things have kind of compounded the issues that you know,

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<v Speaker 2>all real estate, all UK real estate has had, but

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<v Speaker 2>publicly traded UK real estate in particular has been a

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<v Speaker 2>really unloved place for quite a long period of time. Now, now,

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<v Speaker 2>how have management teams reacted to that? And how of

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<v Speaker 2>opportunities investors reacted to that? A lot of deal making,

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<v Speaker 2>So to start with, you had a lot of public

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<v Speaker 2>to private deals. So private equity firms going, hmmm, I

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<v Speaker 2>can see that that RUT is trading at a big

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<v Speaker 2>discount to the sort of reported value of its properties. Therefore,

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<v Speaker 2>if I can offer shareholders a bit of a premium

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<v Speaker 2>to where the shares are trading right now, but still

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<v Speaker 2>a discount or the value of their assets, well the

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<v Speaker 2>shareholders are happy, and I'm happy because then I can

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<v Speaker 2>probably sell those assets on on the private market, and

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<v Speaker 2>if I get book value, I'm making good money. So

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<v Speaker 2>we had a whole load of public to private deals

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<v Speaker 2>by you know, the likes of Blackstone and Brookfield, et cetera.

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<v Speaker 2>But then more recently we've also had a whole load

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<v Speaker 2>of deals of sort of peer to peer deals where

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<v Speaker 2>I might be a retrading a discount, you might be

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<v Speaker 2>a retrading a discount. But if we do a kind

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<v Speaker 2>of all shared deal, it kind of doesn't really matter.

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<v Speaker 2>It's good in theory for shareholders because then we have

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<v Speaker 2>a bigger asset based, bigger company, more efficient to run,

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<v Speaker 2>lower cost to run. Maybe we get into a bigger index,

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<v Speaker 2>so we might go up into the you know, the

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<v Speaker 2>foot of one hundred or and therefore we get more

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<v Speaker 2>pasts of investment you know, white white port of shareholders,

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<v Speaker 2>all of which is good. So that's been a huge

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<v Speaker 2>driver of consolidation within the sector, which you know, all

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<v Speaker 2>of which has ended up where we are today with

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<v Speaker 2>the biggest rate in the UK. Now the subject to

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<v Speaker 2>interest from the Goliath, the Godzilla of publicly traded real

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<v Speaker 2>estate globally prologies.

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<v Speaker 1>Yeah, I mean, this is a massive deal. Is one thing.

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<v Speaker 1>One thing I just wanted to ask you about that.

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<v Speaker 1>I think your point about costs of managing our portfolio

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<v Speaker 1>is really interesting. Just before we get to prologe, is

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<v Speaker 1>why did so many basically sub scale reaps actually get

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<v Speaker 1>off the ground in the first place. Was it just

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<v Speaker 1>because it was tam made cheap money, or was it

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<v Speaker 1>because I noticed that a lot of it's very niche

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<v Speaker 1>if you go back, it's like, you know, doctors, that

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<v Speaker 1>sort of thing. Lots are different and I'm just wondering

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<v Speaker 1>what it was that made it, I guess, feasible for

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<v Speaker 1>these companies to launch kind of essentially very tiny portfolios.

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<v Speaker 2>Yeah, it's a good question, and the answer to that

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<v Speaker 2>would sort of vary with you know's there's many different

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<v Speaker 2>stories behind each kind of different and different state. But

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<v Speaker 2>if you take for example, Unite, they are the UK's

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<v Speaker 2>biggest public shredded student landlord. Now, twenty years ago, student

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<v Speaker 2>housing was sort of non existent as an institutional asset class.

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<v Speaker 2>It was really wasn't really a thing. Unite they managed

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<v Speaker 2>to raise a small amount of money ipode and they've

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<v Speaker 2>really ridden this huge wave of investment into higher education

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<v Speaker 2>accommodate or accommodation for students and have done fantastically well.

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<v Speaker 2>And it's developed from what was an incredibly obscure niche

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<v Speaker 2>asset class is now quite a mainstay real estate investment.

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<v Speaker 2>You know, you look at look at Blackstone in the

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<v Speaker 2>world's biggest real estate investor. Their single biggest sort of

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<v Speaker 2>bet in UK real estate is in student housing. So

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<v Speaker 2>it's become this very mainstream asset. Now that's a great

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<v Speaker 2>story if you were there in the early you know,

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<v Speaker 2>right at the start with Unite, you've done fantastically well

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<v Speaker 2>it albeit the last couple of years maybe less so.

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<v Speaker 2>So there's been lots of you know, enterprising people who've

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<v Speaker 2>gone right, I think this sector or that sector is

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<v Speaker 2>going to be the next big thing, so they've maybe

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<v Speaker 2>raised a bit of capital and then for what reason,

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<v Speaker 2>it hasn't quite worked out. Again, some of it is timing.

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<v Speaker 2>You know, we saw after twenty twenty two when rates

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<v Speaker 2>blew out, you know, all the reachshare prices collapsed. There

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<v Speaker 2>were people who were then going out talking to investors,

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<v Speaker 2>going right, this is the start of a news cycle,

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<v Speaker 2>this is the time, let's raise some capital. But the

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<v Speaker 2>trouble is, you know, we then had other shocks that

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<v Speaker 2>then meant that those companies then maybe they did list

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<v Speaker 2>they raised a small amount of capital, but then very quickly.

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<v Speaker 2>They were trading at a discount and then they can't

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<v Speaker 2>raise any more capital and they're kind of stuck. And

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<v Speaker 2>so we just had lots and lots of these minnos

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<v Speaker 2>who did manage to get off the ground, but then

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<v Speaker 2>never never got any further and they've just been consolidated. Basically,

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<v Speaker 2>all these subscale players have started to be consolidated.

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<v Speaker 1>Yeah no, and that makes a lot of sense. So

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<v Speaker 1>I's a consolidation that takes is to you that can

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<v Speaker 1>the deal with the D So talking through Sacrel is

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<v Speaker 1>the biggest real estate investment trust less than the UK,

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<v Speaker 1>and it's it's a top. It's in the Footsie fifty,

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<v Speaker 1>so it's the top by end of the Footsie one hundred.

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<v Speaker 1>So it's a big, big company joint talk is through

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<v Speaker 1>what it does and more. The dealers weep at all lugers.

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<v Speaker 2>Yeah sure, yeah, I mean they are there would be

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<v Speaker 2>you know, Crown Jewels of UK probably traded real estate

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<v Speaker 2>and actually their their origin story itself is quite interesting,

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<v Speaker 2>particularly when it comes to M and A. But so

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<v Speaker 2>they they are principally a warehouse landlord. They rent out

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<v Speaker 2>warehouses to you know, various different types of industrial occupies

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<v Speaker 2>and increasing in these days to online retailers and people

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<v Speaker 2>like that. They so historically commercial real estate, you would

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<v Speaker 2>have set the three big sectors where offices, retail and warehouses,

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<v Speaker 2>and offices in retail would have been the kind of

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<v Speaker 2>twin aristocracies, and sheds would have been the like the

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<v Speaker 2>unsex habit sorry sheds being what people in commercial real

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<v Speaker 2>estate call warehouses. And so for your big pension fund,

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<v Speaker 2>it would maybe and this is very crudely speaking, maybe

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<v Speaker 2>they would have had forty percent of the portfolio offices,

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<v Speaker 2>forty percent in retail and twenty percent in warehouses. Now

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<v Speaker 2>these days a you know, that's the allocation has been

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<v Speaker 2>completely upended and is way more diverse. But the big

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<v Speaker 2>story has probably been the massive reduction in the allocation

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<v Speaker 2>to retail and the massive increase in the allocation to

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<v Speaker 2>industrial and warehouses and logistics because of the rise of

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<v Speaker 2>online shopping. The rental growth has been unbelievable. Seagro previously

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<v Speaker 2>known as Slower States exactly reflecting their sort of prime

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<v Speaker 2>asset to the west of London, very popular place for

0:11:29.520 --> 0:11:31.880
<v Speaker 2>warehouses and these days increasing the data centers and we'll

0:11:31.920 --> 0:11:36.000
<v Speaker 2>come on too, that they did a very very well

0:11:36.080 --> 0:11:40.320
<v Speaker 2>timed deal. Just during the GFC they bought a company

0:11:40.360 --> 0:11:42.439
<v Speaker 2>called Brixton, which is the sort of a peer of theirs,

0:11:42.480 --> 0:11:45.640
<v Speaker 2>which was very very over levered, as were they all

0:11:45.800 --> 0:11:48.000
<v Speaker 2>at that point, and it had a lot of vacancy

0:11:48.000 --> 0:11:50.360
<v Speaker 2>in its portfolio. They managed to buy them in about

0:11:50.360 --> 0:11:54.520
<v Speaker 2>two thousand and nine pretty cheap, basically rescued them. And

0:11:54.559 --> 0:11:56.720
<v Speaker 2>what that meant was that then sort of significantly expanded

0:11:56.720 --> 0:11:58.120
<v Speaker 2>their portfolio and they had a lot of space to

0:11:58.200 --> 0:12:01.839
<v Speaker 2>let just as the e commerce story was just kind

0:12:01.840 --> 0:12:03.319
<v Speaker 2>of starting to take off, and that would be a

0:12:03.320 --> 0:12:06.199
<v Speaker 2>few years before that really became clear. But basically over

0:12:06.240 --> 0:12:09.080
<v Speaker 2>the last ten to fifteen years they have benefited massively

0:12:09.120 --> 0:12:11.760
<v Speaker 2>from that, just all this extra demand not only from

0:12:11.800 --> 0:12:15.280
<v Speaker 2>Amazon but also from you know, conventional retailers who've gone

0:12:15.360 --> 0:12:17.480
<v Speaker 2>what's known as omni channel and now do online and

0:12:18.240 --> 0:12:21.760
<v Speaker 2>physical retail. So that is that's the sort of backbone

0:12:21.760 --> 0:12:24.319
<v Speaker 2>of their business, not just UK, big portfolio in Europe

0:12:24.360 --> 0:12:28.880
<v Speaker 2>as well. Then over the last several years, the story

0:12:28.880 --> 0:12:31.440
<v Speaker 2>has evolved, you know, the really hot sexy area within

0:12:31.559 --> 0:12:33.640
<v Speaker 2>the world of industrial logistics became what's known as kind

0:12:33.640 --> 0:12:35.720
<v Speaker 2>of last mile or urban logistics, and those are the

0:12:35.840 --> 0:12:40.640
<v Speaker 2>small warehouses near near our houses, which retailers, which are

0:12:40.679 --> 0:12:42.640
<v Speaker 2>really sought after by people who want to deliver to us.

0:12:42.679 --> 0:12:45.679
<v Speaker 2>Because fine, if you're talking about the UK and you're

0:12:45.920 --> 0:12:48.880
<v Speaker 2>you know, big retailer John Lewis you know, or Amazon,

0:12:48.880 --> 0:12:52.160
<v Speaker 2>you probably but your massive, massive warehouse, your mega shed,

0:12:52.400 --> 0:12:54.800
<v Speaker 2>you put that somewhere in the Midlands near the M one.

0:12:55.480 --> 0:12:56.480
<v Speaker 1>This is big box.

0:12:58.200 --> 0:12:59.960
<v Speaker 2>Yeah, So you drive up the M one past North

0:13:00.240 --> 0:13:01.839
<v Speaker 2>and you'll just see all of which is where I

0:13:01.880 --> 0:13:05.160
<v Speaker 2>grew up. You see all these huge, huge warehouses and

0:13:05.200 --> 0:13:06.680
<v Speaker 2>they're the ones that are designed to kind of serve

0:13:06.720 --> 0:13:09.439
<v Speaker 2>the whole country, so you can drive anywhere within eight

0:13:09.440 --> 0:13:11.040
<v Speaker 2>hours from there, which is how long drives are allowed

0:13:11.080 --> 0:13:13.600
<v Speaker 2>to drive. So ideal place to put it. But that

0:13:13.679 --> 0:13:16.560
<v Speaker 2>doesn't really help with you know, your same data delivery

0:13:16.640 --> 0:13:19.480
<v Speaker 2>or your next day. So what then Amazon or their

0:13:19.520 --> 0:13:22.440
<v Speaker 2>peers need is lots of little warehouses very close to

0:13:22.440 --> 0:13:24.640
<v Speaker 2>where we live. Urban logistics and the rents for those

0:13:24.760 --> 0:13:28.160
<v Speaker 2>have gone absolutely through the roof, partly because they're competing

0:13:28.200 --> 0:13:31.280
<v Speaker 2>for space. You know, live in cities like London, there's

0:13:31.320 --> 0:13:33.520
<v Speaker 2>not enough housing, it's not enough all sorts of things.

0:13:33.600 --> 0:13:35.880
<v Speaker 2>So all of those are under pressure from other uses.

0:13:36.240 --> 0:13:37.920
<v Speaker 2>So even if you you know, if you own one

0:13:37.960 --> 0:13:39.840
<v Speaker 2>of those and you're struggling to rent it, which you

0:13:39.840 --> 0:13:41.559
<v Speaker 2>know in the current market is quite unlikely, but even

0:13:41.559 --> 0:13:43.200
<v Speaker 2>if you were struggling to rent it as a warehouse,

0:13:43.360 --> 0:13:44.880
<v Speaker 2>well you can probably make a lot of money from

0:13:44.920 --> 0:13:48.840
<v Speaker 2>converting it to residential. So that subsector has done very well,

0:13:48.880 --> 0:13:51.400
<v Speaker 2>and again Secret has got quite a big portfolio there.

0:13:51.720 --> 0:13:54.559
<v Speaker 2>And now the future story for Seagro is the data

0:13:54.559 --> 0:13:56.480
<v Speaker 2>center part, which is something that they've just sort of

0:13:56.840 --> 0:13:58.679
<v Speaker 2>relatively tended to be started to talk about over the

0:13:58.760 --> 0:14:01.080
<v Speaker 2>last few years, may be a bit more vocally over

0:14:01.080 --> 0:14:03.880
<v Speaker 2>the last year or two, where they have a lot

0:14:03.880 --> 0:14:07.400
<v Speaker 2>of what's what's called powered land, so they have these

0:14:07.480 --> 0:14:10.720
<v Speaker 2>sites that have access to power, which is the critical

0:14:10.760 --> 0:14:13.480
<v Speaker 2>thing when it comes to data centers. And as mentioned,

0:14:13.520 --> 0:14:14.920
<v Speaker 2>they have a lot of these, a lot of land

0:14:15.000 --> 0:14:18.199
<v Speaker 2>in West London in Slough which is actually key corridor

0:14:18.240 --> 0:14:20.240
<v Speaker 2>for a lot of this stuff. So there's loads of

0:14:20.280 --> 0:14:24.120
<v Speaker 2>potential to build data centers on land that they own,

0:14:24.240 --> 0:14:26.359
<v Speaker 2>some of which you know previously would have been warehouses.

0:14:26.520 --> 0:14:28.160
<v Speaker 2>So if you're a warehouse landlord and all of them

0:14:28.200 --> 0:14:29.840
<v Speaker 2>have been doing this, you've been going through your portfolio

0:14:29.880 --> 0:14:31.680
<v Speaker 2>the last couple years. Going Hm, this was a warehouse

0:14:31.720 --> 0:14:33.880
<v Speaker 2>that I was renting out for tanquedd at square foot

0:14:33.920 --> 0:14:37.000
<v Speaker 2>to some you know company that makes widgets. Actually it's

0:14:37.000 --> 0:14:39.360
<v Speaker 2>got power. I could convert it to a data center

0:14:39.680 --> 0:14:42.000
<v Speaker 2>and maybe a hyperscale will take it and pay me

0:14:42.040 --> 0:14:43.880
<v Speaker 2>a hell of lot more to pounds of square foot.

0:14:44.240 --> 0:14:46.640
<v Speaker 1>So this is basically stuff that's just readly egal as

0:14:46.720 --> 0:14:50.440
<v Speaker 1>data centers rather than they haven't actually they don't all

0:14:50.520 --> 0:14:51.640
<v Speaker 1>in any data cent.

0:14:51.760 --> 0:14:53.920
<v Speaker 2>Yeah, well so they have a small, very small amount

0:14:53.960 --> 0:14:57.040
<v Speaker 2>of kind of operational data centers. But it's basically it's

0:14:57.080 --> 0:14:59.520
<v Speaker 2>it's it's a development story. It's a powered land story.

0:14:59.520 --> 0:15:02.600
<v Speaker 2>And what Segro and some of their peers have been

0:15:02.600 --> 0:15:05.000
<v Speaker 2>doing today is that they're not data center specialists. They

0:15:05.000 --> 0:15:07.480
<v Speaker 2>haven't got a long track record of building this stuff.

0:15:07.680 --> 0:15:10.680
<v Speaker 2>So they've either been partnering with data center specialists or

0:15:10.760 --> 0:15:14.920
<v Speaker 2>sort of just developing stuff to to sort of shell

0:15:15.000 --> 0:15:17.040
<v Speaker 2>and court, so to speak, and then a specialist comes

0:15:17.040 --> 0:15:18.520
<v Speaker 2>in and does does you know some of the more

0:15:18.560 --> 0:15:21.120
<v Speaker 2>technical stuff. Now, as time goes on, they might acquire

0:15:21.160 --> 0:15:23.720
<v Speaker 2>that expertise, they might look to take on some of

0:15:23.760 --> 0:15:26.840
<v Speaker 2>this data center development directly. Themselves that we'll see how

0:15:26.880 --> 0:15:29.640
<v Speaker 2>that story evolves. But that is one of the things

0:15:29.640 --> 0:15:32.400
<v Speaker 2>that's kind of central to this debate about whether or

0:15:32.480 --> 0:15:35.400
<v Speaker 2>not pro logist is interested in Segro is you know,

0:15:35.520 --> 0:15:49.720
<v Speaker 2>at fair value.

0:15:44.960 --> 0:15:47.920
<v Speaker 1>Sole logists come along. It's an all shared deal and

0:15:48.320 --> 0:15:51.640
<v Speaker 1>saw but basically if you're a secret shared order, you'll

0:15:51.680 --> 0:15:55.440
<v Speaker 1>get a bit of the convened entity. And what is

0:15:55.480 --> 0:16:00.000
<v Speaker 1>it that the current place is roughly eat pooon something other,

0:16:00.160 --> 0:16:02.960
<v Speaker 1>isn't it? Yeah, well did it above name pounds? But

0:16:03.040 --> 0:16:04.680
<v Speaker 1>because the ship places have changed.

0:16:04.480 --> 0:16:08.000
<v Speaker 2>Exactly, yeah, so when they initially so it's well, interestingly,

0:16:09.080 --> 0:16:14.480
<v Speaker 2>religis approached. Segos board made proposal, Seagros board unanimously rejected

0:16:14.480 --> 0:16:18.360
<v Speaker 2>it just then basically immediately went public and said we're

0:16:18.360 --> 0:16:20.040
<v Speaker 2>going to tell the market we've made this proposal to

0:16:20.080 --> 0:16:21.720
<v Speaker 2>so they didn't go back and make another offer, which

0:16:21.720 --> 0:16:24.560
<v Speaker 2>you know, I think is interesting in itself. That proposal

0:16:24.800 --> 0:16:27.600
<v Speaker 2>at the time valued Sigarette about nine twenty five pence

0:16:27.600 --> 0:16:30.440
<v Speaker 2>a share, which when you know, is basically exactly in

0:16:30.480 --> 0:16:34.280
<v Speaker 2>line with Seagro's nasset value, their AAV their last reported one.

0:16:34.360 --> 0:16:38.040
<v Speaker 2>So essentially, you know, we will pay you Secro shareholders

0:16:38.160 --> 0:16:40.960
<v Speaker 2>what the company says the assets are worth and given

0:16:40.960 --> 0:16:42.640
<v Speaker 2>that the company at the time was trading at about

0:16:42.680 --> 0:16:45.520
<v Speaker 2>twenty percent discount to its NAV. Okay, that's a twenty

0:16:45.520 --> 0:16:48.120
<v Speaker 2>percent premium to the to the undisturbed share price now

0:16:48.400 --> 0:16:50.240
<v Speaker 2>secret obviously a midily turned around and go, well, hang

0:16:50.280 --> 0:16:53.720
<v Speaker 2>on a second, our share price has been walloped by Iran.

0:16:54.080 --> 0:16:55.960
<v Speaker 2>And actually, if you compare it to you know, the

0:16:56.000 --> 0:16:59.000
<v Speaker 2>share price pre Iran, it's not a very hefty premium.

0:16:59.360 --> 0:17:04.160
<v Speaker 2>And also the NAV it's quite a conservative, backward looking

0:17:04.200 --> 0:17:08.520
<v Speaker 2>sort of measure. Yes, that doesn't ascribe a huge amount

0:17:08.520 --> 0:17:11.400
<v Speaker 2>of value to the sort of potential future earnings in

0:17:11.440 --> 0:17:12.520
<v Speaker 2>our development pipeline.

0:17:12.960 --> 0:17:16.080
<v Speaker 1>You're not placing then the data cent at least not

0:17:17.480 --> 0:17:18.640
<v Speaker 1>exactly exactly.

0:17:18.680 --> 0:17:21.480
<v Speaker 2>So Segro, as part of its defense today, has come

0:17:21.520 --> 0:17:25.639
<v Speaker 2>out with a document or with valuations done for it

0:17:25.680 --> 0:17:28.879
<v Speaker 2>by CBRE, trying to kind of show the value that

0:17:28.920 --> 0:17:31.720
<v Speaker 2>they think is there the future earnings that there will

0:17:31.760 --> 0:17:35.679
<v Speaker 2>be from their from their data center pipeline. And you know,

0:17:36.040 --> 0:17:37.280
<v Speaker 2>wouldn't you know it? It's a lot.

0:17:37.720 --> 0:17:40.320
<v Speaker 1>It's a NOV plus optimism take off.

0:17:40.560 --> 0:17:42.679
<v Speaker 2>Yes, yeah, And to be fair to Seegro, this, you know,

0:17:42.720 --> 0:17:44.760
<v Speaker 2>this is not just purely hope value. There are different

0:17:44.760 --> 0:17:47.960
<v Speaker 2>ways of assessing real estate, and actually this deal kind

0:17:47.960 --> 0:17:50.920
<v Speaker 2>of perfectly highlights it because the UK, you know, arguably

0:17:50.920 --> 0:17:53.800
<v Speaker 2>and maybe a little bit anachronistic, we still tend to

0:17:53.960 --> 0:17:58.520
<v Speaker 2>think about NAV as a sort of key metric for

0:17:59.080 --> 0:18:02.480
<v Speaker 2>understanding real estate value and how we talk about roots

0:18:02.480 --> 0:18:05.040
<v Speaker 2>and revaluations. Although a lot of analysts would you tear

0:18:05.040 --> 0:18:07.320
<v Speaker 2>their hair out and say, please don't we do when

0:18:07.359 --> 0:18:09.040
<v Speaker 2>we when we have these deals, we talk about you know,

0:18:09.119 --> 0:18:10.080
<v Speaker 2>is it a discount? Now? Is it?

0:18:10.800 --> 0:18:12.000
<v Speaker 1>Would analysts fear?

0:18:12.960 --> 0:18:18.080
<v Speaker 2>So we focus more on earnings, which is how the

0:18:18.240 --> 0:18:23.160
<v Speaker 2>US do actually value their companies. So because I immediately

0:18:23.160 --> 0:18:24.959
<v Speaker 2>did this when you know, when the deal was well,

0:18:24.960 --> 0:18:26.840
<v Speaker 2>when the proposals announced that, right, so you know this

0:18:26.920 --> 0:18:29.680
<v Speaker 2>is roughly in line with NAB. How are the peers

0:18:29.680 --> 0:18:31.639
<v Speaker 2>in the US trading Well, you can't, you know, they

0:18:31.640 --> 0:18:33.920
<v Speaker 2>don't publish their NAB in the same way. But what

0:18:33.960 --> 0:18:36.359
<v Speaker 2>you can say they focus on earnings. They focus on

0:18:36.359 --> 0:18:38.919
<v Speaker 2>you know, f FO and metrics like that, funds from operations.

0:18:39.280 --> 0:18:43.359
<v Speaker 2>What you can see is particularly the data center landlords

0:18:43.359 --> 0:18:46.520
<v Speaker 2>in the US, digital realty next, people like that are

0:18:46.520 --> 0:18:51.239
<v Speaker 2>trading on really really elevated multiples to earnings, which you know,

0:18:51.320 --> 0:18:53.280
<v Speaker 2>it's not an apples to apples thing, but I think

0:18:53.280 --> 0:18:56.280
<v Speaker 2>it's fair to say they would essentially be trading at

0:18:56.280 --> 0:18:59.200
<v Speaker 2>a big premium to NAB, which is kind of the

0:18:59.240 --> 0:19:03.320
<v Speaker 2>market awarding a lot of hope value there. And you

0:19:03.359 --> 0:19:06.440
<v Speaker 2>do see that in the UK sometimes, you know, when

0:19:06.480 --> 0:19:09.640
<v Speaker 2>when the stock market decides right, you know we're at

0:19:09.640 --> 0:19:12.199
<v Speaker 2>the start of cycle, we can see that values are

0:19:12.240 --> 0:19:14.720
<v Speaker 2>at the bottom and they're about to go up. You know,

0:19:14.760 --> 0:19:16.679
<v Speaker 2>hopefully rents are about to go because no one's built anything.

0:19:17.119 --> 0:19:20.480
<v Speaker 2>The sector will sometimes then traded a slight premium, and

0:19:20.520 --> 0:19:22.240
<v Speaker 2>then Segre itself was trading at a bit of a

0:19:22.240 --> 0:19:27.119
<v Speaker 2>premium for a few years before, which was you know,

0:19:27.240 --> 0:19:28.960
<v Speaker 2>to do with the fact that warehouse there was a

0:19:29.000 --> 0:19:32.040
<v Speaker 2>scarcity of warehouse space. Rents were going up very very fast,

0:19:32.160 --> 0:19:34.040
<v Speaker 2>so the market was willing to price in a bit

0:19:34.080 --> 0:19:35.040
<v Speaker 2>of that future growth.

0:19:35.560 --> 0:19:37.440
<v Speaker 1>Then it does feel a little bit like that classic

0:19:37.560 --> 0:19:42.439
<v Speaker 1>UK US valuation go up more broadly, and you know,

0:19:43.040 --> 0:19:45.680
<v Speaker 1>all the takestocks went less than the US because people

0:19:45.840 --> 0:19:48.879
<v Speaker 1>actually put appraisal on them. The feel is more reflective

0:19:48.920 --> 0:19:54.000
<v Speaker 1>of the potential, etc. I mean, that's interesting. We don't

0:19:54.040 --> 0:19:56.000
<v Speaker 1>know what will happen with there still one or the

0:19:56.040 --> 0:19:59.600
<v Speaker 1>other that's clearly in progress. But again going back to

0:19:59.680 --> 0:20:02.040
<v Speaker 1>fake this is the biggest street in the in the

0:20:02.119 --> 0:20:03.879
<v Speaker 1>UK by quite a long week. It's like a fete

0:20:03.880 --> 0:20:06.200
<v Speaker 1>of the sector or something like that accounts for by

0:20:06.240 --> 0:20:11.320
<v Speaker 1>market value. How much more consolidation can thus be left

0:20:11.560 --> 0:20:14.640
<v Speaker 1>in the sector if you're later at this point a.

0:20:14.600 --> 0:20:16.600
<v Speaker 2>Really interesting question. There was a bit of a sense

0:20:16.640 --> 0:20:19.959
<v Speaker 2>that it had maybe been slowing down slightly from a

0:20:19.960 --> 0:20:23.560
<v Speaker 2>somewhat frenetic pace. But that said, I mean a be

0:20:23.600 --> 0:20:26.639
<v Speaker 2>interesting to see what impact this deal were it to happen,

0:20:26.960 --> 0:20:30.040
<v Speaker 2>you know then has and actually also in terms of

0:20:30.160 --> 0:20:33.240
<v Speaker 2>you know, potentially some some new companies coming to market. Yeah.

0:20:33.240 --> 0:20:35.919
<v Speaker 2>Bloomberg reported the other day that Blackstone has done some

0:20:36.040 --> 0:20:40.600
<v Speaker 2>very initial investor meetings on a company called Indurant, which

0:20:40.640 --> 0:20:43.399
<v Speaker 2>is one of its portfolio companies, which owns a lot

0:20:43.440 --> 0:20:46.800
<v Speaker 2>of UK warehouses, which rest I see, you're able to

0:20:46.800 --> 0:20:48.280
<v Speaker 2>disappear as a publicly traded the UK name.

0:20:48.320 --> 0:20:51.200
<v Speaker 1>Maybe there'll be a new one.

0:20:51.119 --> 0:20:54.040
<v Speaker 2>Yeah, Well, this is not something to be clear that

0:20:54.040 --> 0:20:56.399
<v Speaker 2>we're reporting is going to happen anytime particularly soon, but

0:20:56.560 --> 0:20:57.200
<v Speaker 2>you know, very.

0:20:57.200 --> 0:20:59.920
<v Speaker 1>Very early there is the glimmerings of a potential.

0:21:00.680 --> 0:21:02.760
<v Speaker 2>Yes, but if we go back to what we were

0:21:02.760 --> 0:21:08.080
<v Speaker 2>talking about earlier, and you know cost and you know

0:21:08.119 --> 0:21:10.680
<v Speaker 2>that being a driver of consolidation, there's there's clearly there's

0:21:10.680 --> 0:21:13.360
<v Speaker 2>a lot more to be done. Right, We've got multiple

0:21:13.840 --> 0:21:16.240
<v Speaker 2>For example, let's take London offices where you've got two

0:21:16.840 --> 0:21:21.040
<v Speaker 2>London office routes that you know are both arguably still

0:21:21.080 --> 0:21:24.359
<v Speaker 2>somewhat subscales. That'd be great Portland and derwant London. You know,

0:21:25.320 --> 0:21:27.400
<v Speaker 2>for many, many years has been speculation about well, could

0:21:27.440 --> 0:21:29.480
<v Speaker 2>they do something? Would they do something? Now obviously neither

0:21:29.520 --> 0:21:31.480
<v Speaker 2>management team is going to be terribly incentivized to do

0:21:31.560 --> 0:21:33.480
<v Speaker 2>that and you know, do themselves out of a job.

0:21:33.520 --> 0:21:38.200
<v Speaker 2>But there's there's that as an opportunity. You've got some landlords,

0:21:38.680 --> 0:21:41.760
<v Speaker 2>you know, trying to pivot into different sectors and again

0:21:41.840 --> 0:21:44.160
<v Speaker 2>that potentially an opportunity there to sort of take out

0:21:44.640 --> 0:21:46.959
<v Speaker 2>subscale businesses into those in those new sectors that they

0:21:46.960 --> 0:21:50.480
<v Speaker 2>want to get into. And you know, again today what

0:21:50.560 --> 0:21:54.280
<v Speaker 2>do you know, Trump talking about the Iran c is

0:21:54.320 --> 0:21:56.680
<v Speaker 2>far being over straight away all the real estate stocks

0:21:56.720 --> 0:22:00.119
<v Speaker 2>have sold off again, there'll be some more opportunity to

0:22:00.200 --> 0:22:02.159
<v Speaker 2>stic for evate equity capital wizing in the wings, if

0:22:02.160 --> 0:22:05.040
<v Speaker 2>that is to persist in those discounts blow out again. Yeah,

0:22:05.200 --> 0:22:08.320
<v Speaker 2>there's several UK rates that are still triding it really

0:22:08.400 --> 0:22:11.360
<v Speaker 2>quite massive discounts to their to their reported asset value.

0:22:11.440 --> 0:22:13.480
<v Speaker 1>I mean, I do think this is and I guess

0:22:13.520 --> 0:22:16.239
<v Speaker 1>this must be frustrating for people in the sector. But

0:22:16.280 --> 0:22:19.200
<v Speaker 1>at the same time, if you are an investor, kind

0:22:19.200 --> 0:22:22.480
<v Speaker 1>of private investor, and obviously nothing on this podcast is

0:22:22.480 --> 0:22:25.600
<v Speaker 1>a recommendation or anything like that, if you're of the

0:22:25.760 --> 0:22:29.680
<v Speaker 1>view that interest rates in the UK are probably are

0:22:29.840 --> 0:22:33.199
<v Speaker 1>possibly going to come down, or that the market is

0:22:33.359 --> 0:22:37.840
<v Speaker 1>overly pessimistic about the direction of rates rather thinks are

0:22:37.840 --> 0:22:41.320
<v Speaker 1>going to keep going up, then rates are fairly interest

0:22:41.359 --> 0:22:44.320
<v Speaker 1>rates sensitive sector and a fairly obvious way you play

0:22:44.400 --> 0:22:47.199
<v Speaker 1>those hunches one way or the other. But beyond that,

0:22:47.240 --> 0:22:50.320
<v Speaker 1>there is also there is quite as you say, most

0:22:50.320 --> 0:22:53.119
<v Speaker 1>of these are trading that fairly solid discounts to their

0:22:53.160 --> 0:22:56.040
<v Speaker 1>net asset value. It's true the sectory, and I from

0:22:56.080 --> 0:22:58.480
<v Speaker 1>a value point of view.

0:22:58.520 --> 0:23:01.760
<v Speaker 2>Yes, there's a whole load of different ways you can

0:23:01.760 --> 0:23:04.320
<v Speaker 2>slice it and die it. But basically the UK sector

0:23:04.400 --> 0:23:07.879
<v Speaker 2>right now is on a massive, massive sale. And if

0:23:07.920 --> 0:23:10.520
<v Speaker 2>you're willing to take a view that probably we are.

0:23:10.840 --> 0:23:13.000
<v Speaker 2>You know, the direction of rates is more likely to

0:23:13.080 --> 0:23:16.000
<v Speaker 2>be steady or down than it is up. Then, you know,

0:23:16.080 --> 0:23:18.560
<v Speaker 2>then that would be a by signal. There's also you know,

0:23:18.600 --> 0:23:22.880
<v Speaker 2>it's not just interest rates. The actual value that management

0:23:22.960 --> 0:23:26.040
<v Speaker 2>teams bring here is supposed to be on the operational side.

0:23:26.160 --> 0:23:29.520
<v Speaker 2>So in terms of increasing rents, increasing earnings, well, that

0:23:29.640 --> 0:23:33.199
<v Speaker 2>side of the ledger actually looks pretty positive for the

0:23:33.240 --> 0:23:36.640
<v Speaker 2>reason being that, you know, going back even further, we've

0:23:36.640 --> 0:23:39.240
<v Speaker 2>had Brexit, then we had the pandemic, then we've had

0:23:39.440 --> 0:23:43.280
<v Speaker 2>you know, runaway inflation, so a whole series of bad shocks,

0:23:43.440 --> 0:23:46.880
<v Speaker 2>which kind of means across most sectors, no one's really

0:23:46.880 --> 0:23:49.400
<v Speaker 2>built very much for ten years plus now in the UK,

0:23:49.520 --> 0:23:51.879
<v Speaker 2>whether that's offices, you know, retail, no one's built anything

0:23:51.920 --> 0:23:54.400
<v Speaker 2>because we had far too much of retail. Warehouse development

0:23:54.440 --> 0:23:56.760
<v Speaker 2>has still gone on, but even a lot of that

0:23:56.920 --> 0:24:00.000
<v Speaker 2>was kind of upended by the end of the cheap money.

0:24:00.320 --> 0:24:04.200
<v Speaker 2>So there isn't there's certainly not oversupply in many if

0:24:04.240 --> 0:24:06.399
<v Speaker 2>any sectors, and in quite a few of the sectors

0:24:06.400 --> 0:24:11.000
<v Speaker 2>there's really quite chronic undersupply, and assuming that the economy

0:24:11.200 --> 0:24:13.359
<v Speaker 2>you know, Okay, the economy has not been going great guns,

0:24:13.359 --> 0:24:16.159
<v Speaker 2>but assuming it sort of continues to just about take along,

0:24:16.600 --> 0:24:20.159
<v Speaker 2>that should mean that rental growth is pretty robust, and

0:24:20.160 --> 0:24:21.959
<v Speaker 2>therefore that should be a good growth opportunity.

0:24:22.119 --> 0:24:24.439
<v Speaker 1>Yes, in the credit and the micro side. Because the

0:24:24.440 --> 0:24:26.520
<v Speaker 1>other I think that is something we haven't really talked about,

0:24:26.560 --> 0:24:29.720
<v Speaker 1>but because the other big issue for vestas is if

0:24:29.720 --> 0:24:31.680
<v Speaker 1>you're a freie, this can be a receation. That means

0:24:31.680 --> 0:24:34.920
<v Speaker 1>lots of empty premises, means lots of can you the

0:24:35.000 --> 0:24:38.840
<v Speaker 1>landlord's carrying a lot it can avoid basically, And that's

0:24:38.840 --> 0:24:42.520
<v Speaker 1>actually something that we haven't really seen because walking from

0:24:42.520 --> 0:24:46.199
<v Speaker 1>home didn't end up being permanent. And you know, we

0:24:46.320 --> 0:24:48.480
<v Speaker 1>didn't have a massive recession at any point over the

0:24:48.560 --> 0:24:51.800
<v Speaker 1>last five years, despite all the kind of expectation that

0:24:51.840 --> 0:24:53.720
<v Speaker 1>we would, so the actually, as you see, the actual

0:24:53.760 --> 0:24:56.920
<v Speaker 1>operational side of the industry has been pretty robust.

0:24:57.200 --> 0:24:58.679
<v Speaker 2>Yeah. I mean, the other thing to say on that

0:24:58.680 --> 0:25:00.720
<v Speaker 2>point is if you go to the you know, the

0:25:00.800 --> 0:25:04.480
<v Speaker 2>last really painful recession, I mean, putting the pandemic to

0:25:04.520 --> 0:25:08.120
<v Speaker 2>one side that we had here in the financial crisis. Yes,

0:25:08.160 --> 0:25:12.840
<v Speaker 2>obviously there were huge credit issues within within landlord's portfolios

0:25:12.840 --> 0:25:15.480
<v Speaker 2>in terms of their tenants. But even then vacancy didn't

0:25:15.520 --> 0:25:19.240
<v Speaker 2>actually get that much. I mean, yes it got worse,

0:25:19.280 --> 0:25:21.280
<v Speaker 2>but it wasn't existential. What the real problem was the

0:25:21.280 --> 0:25:24.000
<v Speaker 2>fact they were all massively over leveraged, and that was

0:25:24.000 --> 0:25:26.520
<v Speaker 2>the big issue. That they have learned their lesson. The

0:25:26.640 --> 0:25:29.400
<v Speaker 2>UK reads have learned their lesson, and as a sector

0:25:29.760 --> 0:25:33.480
<v Speaker 2>they are not generally speaking, significantly over leveraged now. They

0:25:33.480 --> 0:25:37.520
<v Speaker 2>are generally carrying pretty conservative levels of leverage, which you know,

0:25:37.760 --> 0:25:40.240
<v Speaker 2>even if there were to be some other significant shock

0:25:40.320 --> 0:25:42.760
<v Speaker 2>that came along now which suddenly you know, pushed real

0:25:42.840 --> 0:25:46.000
<v Speaker 2>estate values down significantly. Again, they've still got a lot

0:25:46.040 --> 0:25:49.119
<v Speaker 2>of headrooms, so that kind of major threat to the

0:25:49.160 --> 0:25:50.879
<v Speaker 2>sector they've largely dealt with.

0:25:51.119 --> 0:25:55.840
<v Speaker 1>Yeah, it's pretty resilient. Well, Jake, that was really really useful.

0:25:56.440 --> 0:25:58.880
<v Speaker 1>Really appreciate your team, and thanks very much for coming.

0:25:58.920 --> 0:26:00.840
<v Speaker 1>Then again, I'm sure we'll get you back in when

0:26:00.880 --> 0:26:03.560
<v Speaker 1>we find out what actually happens with this secret deal.

0:26:04.640 --> 0:26:08.000
<v Speaker 2>Yeah, yes, well I'm sure it'll keep me busy for sometimes.

0:26:08.200 --> 0:26:09.199
<v Speaker 2>But thank you so much for having me.

0:26:13.280 --> 0:26:15.560
<v Speaker 1>Thanks for listening to this week's Merton Talks Your Money.

0:26:15.680 --> 0:26:17.800
<v Speaker 1>If you like a show, rate reviewing, subscribe whatever you

0:26:17.920 --> 0:26:20.560
<v Speaker 1>listen to podcasts. Also, be sure to follow me on

0:26:20.680 --> 0:26:23.600
<v Speaker 1>Exit Joint and does host Effect. You can find Jack

0:26:23.680 --> 0:26:26.520
<v Speaker 1>on LinkedIn. The Family saw the most exciting of all

0:26:26.560 --> 0:26:30.439
<v Speaker 1>social media outlets. This episode was produced by Summer, Sadi

0:26:30.560 --> 0:26:33.080
<v Speaker 1>and Moses and questions and comments on this show and

0:26:33.119 --> 0:26:35.600
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0:26:35.640 --> 0:26:37.480
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