Britain's property sector is getting the message on the weak UK economy. LondonMetric Property’s (LMPL.L) all-share merger with similarly sized LXi REIT (LXIL.L) creates a 4 billion pounds ($5 billion) group that will constitute the country’s fourth largest landlord. Both sides derive something from it.
LondonMetric isn’t getting a bargain. The discount from the deal implied on LXi’s net tangible assets (NTA) is just 4%, while the market in general is around 15% and bigger players like British Land (BLND.L) are more like 30%, based on the latter’s September valuation, Breakingviews calculated. But it does allow the buyer to diversify away from managing warehouses, to other areas like hospitals and leisure facilities like Alton Towers.
More importantly, both sides get a financial benefit. With interest rates spiking over the past year, LXi would be able to bring the average cost of debt down to 3.9% from over 5% on its 1.2 billion pounds in gross debt. And LXi boasts a lower operating cost of 7% as a percentage of gross rental income, which will reduce LondonMetric’s equivalent level when they combine. With the UK set to grow only 0.6% in 2024, according to the International Monetary Fund, that gives greater protection against the duo’s tenants having a trickier time. (By Yawen Chen)
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(The author is a Reuters Breakingviews columnist. The opinions expressed are their own)
