UK Commercial Property REIT has revealed it is in talks with smaller rival real estate investor Picton Property over a potential all-share merger.
Peter Pereira Gray, chairman of the FTSE 250-listed real estate investment trust known as UKCM, said: “There can be no certainty either that an offer will be made nor as to the terms of any such offer.”
In a separate statement, Picton said that under the terms of its proposal the combined company would be internally managed.
UKCM, which is managed by Abrdn, holds a portfolio almost 60% composed of industrial holdings such as warehouses, has a market cap of £730m and its portfolio was valued at £1.26bn at the end of June.
Picton Property has a market cap of £360.9m and a portfolio valued at £766m at the end of March.
Peel Hunt, the investment bank, suggested that the combination of the two businesses would create a REIT with a market cap of £1.1bn and a portfolio worth £2bn.
The bank said the two businesses trade on similar valuation metrics, with Picton on a 33% discount to June net tangible assets and UKCM on a 31% discount to September net tangible assets.
“While it will be interesting to see if others express an interest in either vehicle, this news should be good for both sets of shareholders and the wider UK real estate sector,” commented Matthew Saperia and James Carswell of Peel Hunt.
Based on its initial modelling, Peel Hunt expected the merger to deliver earnings per share growth of two percentage points for Picton shareholders. UKCM shareholders are expected to see their earnings per share fall slightly by one point.
Miranda Cockburn, covering real estate equity research at Berenberg bank, said the possible all-share merger was positive for the UK REIT sector.
“There are too many smaller diversified REITs with limited liquidity and little differentiation between strategies. With the demise of the property open-ended funds, the diversified REITs provide an important role in offering investors exposure to a range of real estate sub-sectors but greater liquidity is required and so consolidation within the sector is welcome,” she said.
According to UK takeover rules, Picton will have to declare a firm intention to make an offer by 6 December.
Picton and UK Commercial Property told City A.M they could not provide further information.