Interest rate cuts failed to deliver a longed-for recovery in real estate investment trusts (Reits) last year but the steep discounts still on offer mean property cannot be ignored in 2025. 

Property investors cheered in August as the Bank of England delivered its first interest rate cut in four years, reducing the base rate to 5% with a quarter-point cut. Just one more reduction, to 4.75%, followed in November, scuppering hopes of four cuts in 2024.

That proved disappointing for Reits, with the EPRA UK Total Return index, which tracks the UK property market, tumbling 11.9% during 2024. While the rental market has remained buoyant, real estate valuations have failed to follow suit.

Deutsche Numis investment companies sales director Justin Bell said the fourth quarter marked the downfall for the index. Having been up 7% in the year to date in September, the EPRA index delivered a ‘dramatic decline’ in the fourth quarter, ‘driven by an increase in the GBP rates curve in the run-up to and following the UK Budget in October’.

Bell said the Reit sector correlation with long-dated gilts held true in 2024, ‘ending with broadly the same return’.

‘This came, albeit with a greater degree of volatility, as a result of leverage inherent in the asset class increasing sensitivity to rates,’ he said.

The residential sector – including Ground Rents Income (GRIO ), PRS Reit (PRSR ), Residential Secure Income (RESI ) and Triple Point Social Housing (SOHO ) – enjoyed the best performance in 2024 as it was buoyed by corporate action.

Both PRS Reit and RESI investors voted to go into wind-down. The former followed the ousting of chair Steve Smith, who angered shareholders with an extension of the management contract with Sigma, while the latter portfolio of retirement rental and shared-ownership homes was shuttered after a period of poor performance.

However, RESI actually posted an encouraging update this week on earnings growth.

The worst-performing sector was student accommodation, with Unite Group (UTG) and Empiric Student Property (ESP ) suffering the most. Unite shareholders were down 19.8% over the year and Empiric dropped 8.4%.

Bell said the student sector ‘suffered from high share price ratings at the start of 2024, which were hit by negative press around overseas student numbers and universities’ financial health’.

There was ‘little love for office or self-storage Reits’ but retail, which took a long time to recover following the pandemic, ‘enjoyed a relative bounce in sentiment, with shopping centres and retail warehouses both seen as attractive allocations’.

This was cemented by Hammerson (HMSO), the owner of Brent Cross in North London and the Bullring in Birmingham, and a merger between two small-cap funds – Capital & Regional and NewRiver Reit (NRR ) – last September.

The appeal of industrial assets endured, but Bell said it was ‘the most divergent sector’, with lower yields but higher rental growth. Although the sector enjoyed ‘supportive mega trends’, it also saw vacancies creeping up as speculative investment came through from the boom years of 2021 and 2022.

‘The bears won in the end, but not before Segro (SGRO) could issue £900m equity and LondonMetric (LMP) and Tritax BigBox (BBOX ) could execute £3bn of mergers with LXI and UK Commercial Property, respectively,’ he said.

Overall, real estate continued to be a tough market in 2024 as, said Bell, the ‘rate-cut thesis the sector was waiting for… didn’t play out’ and it would ‘be lazy to rely on this to come to the rescue in 2025’.

The recent bond yield moves, which have seen gilt yields spike to global financial crisis level highs amid a global selloff, also ‘cannot be ignored’.

‘No sector operates in a vacuum from alternative investment choices, which remain a drain on property allocations, particularly from private wealth and multi-asset investors,’ said Bell.

‘Reits may lack the futuristic vision and the multiples of AI or weight-loss drug stocks. However, valuations reflect that, with the sector showing a 26% discount to net asset value, or over 100 basis points of yield expansion, priced in.’

Investors are paid a ‘healthy yield’, currently averaging 6.9% in UK commercial property, to await a turnaround, which Bell said could come from a sector and/or UK rerating or ‘through more localised corporate action and M&A, which is bound to be a feature again in 2025’.