UK REITs deliver strong performance, but investors look elsewhere

The contradiction is striking: office leasing activity in central London is operating at a 20-year high, occupancy rates are at their strongest levels in decades, and several companies are reporting robust earnings growth. Nevertheless, sector valuations continue to face significant pressure.

British Land has reported that leasing activity in central London has reached its highest level in 20 years, while Land Securities Group (Landsec) has recorded its highest portfolio occupancy rates in two decades.

At the same time, LondonMetric Property announced a 13.9% increase in profits, reinforcing the positive picture at an operational level.

However, the market continues to value the sector cautiously. The FTSE 350 REIT index trades at an average discount of approximately 26% to reported net asset values, more than double the level seen in autumn 2024 and close to the lows recorded after the abrupt end of the ultra-low interest rate era.

Bond yields overshadow fundamentals

According to analysts, the explanation lies primarily in bond markets rather than company performance.

Listed real estate companies have already faced similar pressures in recent years, initially following the market turmoil triggered by the UK’s 2022 fiscal announcement and subsequently due to the gradual rise in government bond yields.

Recent geopolitical developments and tensions in the Middle East have further weighed on sentiment, as investors reassess expectations regarding inflation and interest rates.

Government bond yields and swap rates are key valuation benchmarks for the commercial real estate market, as they influence both financing costs and the relative attractiveness of property yields compared with fixed-income investments.

Senior commercial real estate economist at Capital Economics, Matthew Pointon, estimated that developments in the Middle East could further deteriorate second-quarter valuation trends, as higher yields continue to put pressure on alternative asset prices.

Macroeconomic factors overshadow the property market

Beyond international developments, domestic political uncertainty in the United Kingdom continues to exert upward pressure on borrowing costs.

Recent political turbulence and debates over government stability continue to affect yields on UK government bonds.

At the same time, some weaker-than-expected economic indicators—such as lower-than-expected readings for inflation, employment, and retail sales—have temporarily supported gilt yields.

According to Panmure Liberum analyst Tim Leckie, real estate companies are currently not a priority for broader investment portfolios, as investor sentiment remains largely driven by movements in the bond market.

As a result, despite strong performance in leasing activity, occupancy, and operational metrics, the market valuations of UK REITs continue to be determined more by macroeconomic developments than by underlying real estate fundamentals.