Tritax and UK Commercial Property Reit to merge for £4 billion

A newcomer is set to enter the upper echelons of Britain’s commercial property sector after two of the country’s biggest warehouse owners agreed a multibillion-pound merger.

The tie-up between Tritax Big Box and UK Commercial Property Reit is intended to create a landlord with a £6.3 billion portfolio, made up mostly of logistics depots and warehouses, that generates £290 million a year in rent.

With an expected stock market value of close to £4 billion, it would become the fourth largest commercial property owner listed on the London Stock Exchange and would be in with a shout of inclusion in the FTSE 100 index of Britain’s biggest publicly quoted businesses.

As part of the proposed combination, shareholders in UK Commercial Property Reit would own 23.3 per cent of the new company, with Tritax investors owning the remainder. The deal values UK Commercial Property Reit at £924 million, a 10.8 per cent premium to where its shares closed at the end of last week but a 10 per cent discount to its net asset value.

The board of UK Commercial Property Reit has said that it would recommend that shareholders accept the offer should Tritax submit a formal bid in writing. However, Peter Pereira Gray, its chairman, is not backing the offer, much to the surprise of industry-watchers. The implication is that he sees better value in taking a different route.

Towards the end of last year, UK Commercial Property Reit held talks over a possible merger with Picton Property Income, but that deal fell through after Phoenix, the former’s largest shareholder, refused to give its backing. This time Phoenix has agreed to vote all of its shares, a 43.4 per cent stake, in favour of merging with Tritax.

Tritax has until the close of play on March 8 to make a formal offer. Both companies noted that there was no certainty that a deal would be done.

Tritax shares fell 6 1/2p, or 4 per cent, to 153 3/4p, largely attributed to a technical fall that reflects the premium being paid for UK Commercial Property Reit. Shares in UK Commercial Property Reit rose by 3p, or 4.8 per cent, to 67 1/4p, just shy of the 71.1p at which they are valued by Tritax’s proposed offer.

Tritax Big Box, launched a decade ago, now owns dozens of the “mega box” warehouses often found alongside motorways and big roads. It counts Amazon, Ocado, B&Q and Argos among its biggest tenants. UK Commercial Property Reit is much smaller. It also owns a lot of warehouses, but these generally have less scale, a part of the market where Tritax is keen to expand. Its portfolio also includes hotels, leisure complexes, retail parks and offices, although analysts expect these to be sold off eventually.

Tritax is chaired by Aubrey Adams, the former chief executive of Savills, while Pereira Gray, his opposite number at UK Commercial Property Reit, used to oversee the Wellcome Trust’s investment division. Both companies are run by fund managers from Abrdn, which is also Tritax’s leading shareholder.

By merging, they would bring together “complementary logistics-oriented investment portfolios” and would broaden the offer to tenants by putting Tritax’s “mega boxes” with UK Commercial Property Reit’s smaller sheds in and around city centres. “This deal looks to make good sense to us,” Andrew Saunders, at Shore Capital, the broker, said.

There has been a wave of consolidation in the British commercial property market. The consensus is that landlords need to get bigger if they want to attract investment from the big institutions and fund houses. Merging is the quickest way to do that, especially with the cost of debt having risen sharply over the past couple of years, while tapping shareholders for more money is, in effect, being blocked by the big discounts between landlords’ share prices and their net asset values.

The big investors do not want to take large stakes in smaller companies that they might then struggle to sell. Tritax and UK Commercial Property Reit spoke of the “improved liquidity” that would be achieved through becoming one larger company.

Being bigger also should give the enlarged group access to more favourable rates from lenders and there was a mention of the “expected cost-of-capital benefits”.

Others in the sector have made similar moves. LondonMetric and LXi Reit, which owns the land on which Thorpe Park and Alton Towers, the amusement parks, sit, agreed to merge last month, creating another £4 billion property group. Custodian Property Income Reit and Abrdn Property Income Trust, which between them own hundreds of shops, offices and warehouses, also have said that they are merging. Almost a year ago, Shaftesbury and Capital & Counties, which together own 40 acres of London’s West End, worth about £5 billion, including Covent Garden, came together.

“We expect more deals in the coming months,” Paul May, a property industry analyst at Barclays, said.

Even as recently as ten years ago, sheds, as warehouses are referred to in the industry, were hardly the most fashionable part of the property sector.

The big, grey boxes that line motorways and outskirts of towns lacked the appeal of a shiny glass office tower or a huge shopping mall. That they were unloved for so long may explain why warehouse agents, affectionately known as “shed shifters”, are generally that bit more affable than their cooler, slicker peers who sell and lease offices and malls.

Ten years ago, the world of commercial property was dominated by those companies that built and owned office blocks and shops.

Land Securities, which owns shopping centres including Trinity in Leeds and most of the office space in Victoria, central London, was the country’s biggest listed property group. Second was British Land, another big London office landlord that also owns a number of malls, including Meadowhall in Sheffield.

How times change. The stock market values of both Landsec and British Land have almost halved over the past decade. Hammerson, one of the country’s major shopping mall owners, has fared even worse, although that it is still around is more than can be said for Intu, which collapsed in 2020.

The traditional giants of commercial property have been caught out by the rise of online shopping and the pandemic, which boosted the popularity of working from home.

At the same time, ecommerce and the pandemic are the two main factors behind the rapid rise of sheds. More people shopping online means retailers and logistics firms need more space to store and move parcels, while the hit to supply chains during the pandemic has prompted more firms to bring their production and stockpiling capacity closer to home.

Segro is now, by some distance, the biggest real estate company listed in London. Assuming the mergers of LXi Reit and LondonMetric and of Tritax Big Box and UK Commercial Property go through, three of the top five commercial property stocks in London will be companies primarily focused on building and letting out warehouses.

No longer are shed shifters an afterthought, consigned to a few desks in the corner of an office. They are more in demand than ever, given that there is very little warehouse space left to rent anywhere in the country, which is pushing up rents ever higher.

Other “alternative” sectors have also emerged over the past decade. Unite is leading the way for student housing, and Big Yellow is the biggest of a number of self-storage groups that are growing quickly.