UK commercial property firms in billion-pound merger talks

The UK property sector received a jolt this morning with the news UK Commercial Property REIT (UKCM), managed by investment group abrdn (ABDN), and independently-run Picton Property Income (PCTN), were in all-share merger talks.

If the talks are successful, the merged company would have assets of almost £2 billion, with UKCM’s portfolio valued at £1.27 billion at the end of September and Picton’s portfolio worth £761 million at the end of June.

Due to the big discount on their shares, however, the combined market cap of both companies only just tips the scale at £1 billion.

WHAT ARE THE BENEFITS OF MERGING?

UKCM’s portfolio is heavily weighted to industrial assets like business parks and retail warehouses, which make up over 70% of assets by value, and towards the south of the UK, especially the south-east.

Picton’s portfolio is similarly tilted with just under 60% of its assets in the industrial sector, but it has a higher weighting in offices at 31% against just over 10% at UKCM, with the rest in retail and leisure.

Commercial property valuations have stabilized in the second and third quarters, with Picton seeing just 1 1.1% decrease in NAV (net asset value) per share in the three months to June and UKCM seeing a 0.5% decline in the three months to September.

However, property company shares are still trading significantly below NAVs, with the average discount across the UK commercial property trust sector currently close to 27% according to the AIC (Association of Investment Companies).

On paper at least, merging two trusts with similar activities and similar portfolios could lead to reduced costs, a reduced discount to NAV, better borrowing terms and improved liquidity for the shares, as well as potentially lower fees for investors due to the larger asset base. Today’s deal is likely to put pressure on other firms to consider merging as a way of reducing costs and the discount on their property valuations.

Issue Date: 08 Nov 2023