The recent wave of takeovers and mergers in the quoted UK commercial real estate sector has continued this week with the proposed all-share takeover of UK Commercial Property (UKCM) by Tritax Big Box (BBOX).

The deal, which values UKCM at 71.1p per share or a 10.8% premium to the previous day’s closing price, would create the UK’s fourth-largest REIT (real estate investment trust) by market cap with a combined portfolio valued at around £6.3 billion, and has the blessing of UKCM’s two biggest shareholders.

In November 2023, UKCM was approached by smaller rival Picton Property Income (PCTN) with a view to merging, but that deal was sunk by lack of support from UKCM’s largest shareholder Phoenix Life, which owns 43% of the company’s shares.

Since then, Custodian Property Income (CREI) and abrdn Property Income (API) have agreed an all-share deal with Custodian paying a 29% premium for API shares to create a company with around £1 billion in assets.

While the API deal makes obvious sense – both firms have an income focus as well as a similar strategy of investing in regional, sub-institutional sized assets with strong rental growth potential – there were few who predicted a tie-up between Tritax Big Box and UKCM.

The firms argue there is a ‘compelling strategic and financial rationale’ for the combination given both have logistics-oriented portfolios, but UKCM has just 60% exposure to the industrial warehouse sector and its property sizes are smaller while the rest of its holdings comprise retail, office and leisure assets, including a Hyatt hotel under construction in Leeds.

‘As one of the largest funds in the peer group and with its shares trading at a tighter discount than many of its closest peers, UKCM was not the most obvious takeover candidate. In addition, due to its specialist industrial & logistics sector focus, BBOX was perhaps not the most obvious acquirer’, commented Winterflood’s investment trust specialist Emma Bird.

Bird also observes, ‘some shareholders will have owned UKCM for its diversified portfolio and its relatively low risk profile, which will not be maintained post-merger given Tritax Big Box’s specialist strategy, higher leverage (32% LTV as at 31 December) and notable development exposure (7% of portfolio)’.

There may be a less obvious reason for the deal, however: asset manager abrdn (ABDN), which manages UKCM, also owns 60% of Tritax Management, and is actively trying to reduce overlap between its funds and trusts, which it has already done in the Japanese and Asian markets.

January’s takeover of API by Custodian and this week’s proposed deal could therefore represent further ‘housekeeping’. 

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