Property stocks continued to remain popular borrows among short sellers in 2024, with S&P Global data showing that 1.28% of the market cap of global REITs is currently on loan to short sellers looking to profit from a fall in share values.

This makes it the most shorted sector globally, a trend partly driven by property’s perceived vulnerability to high interest rates.

Short selling is a strategy for making money on stocks falling in price, by which an investor borrows a stock, sells it at the current market price, then buys it back again at a later time to return it to the lender. The short seller can turn a profit if the share price drops between the sale and repurchase. Likewise, they can lose money if the stock price increases, because they must return the stock by the pre-agreed date.

In the UK, real estate management and development is the most shorted sector, a trend that has continued from 2023.

However, most of the sector’s short interest is taking place in the US and Asia-Pacific region. For example, Medical Properties Trust in the US has a staggering 40w% of outstanding shares on loan to short sellers, followed by Netstreit (17.72%) and Essential Properties Realty Trust (17%). These are the US’s three mega shorts.

Across Europe, the Middle East and Africa (EMEA), the real estate management and services sector is the most popular type of stock to borrow for short sellers, with a figure equivalent to 0.28% of the sector’s combined market cap on loan. REITs in Europe have the equivalent of just 0.06% of their combined market cap on loan.

Short sellers’ interest in UK REITs is beginning to reduce as investors warm up to the sector
James Carswell, Peel Hunt

Swedish residential property firm SBB is driving most of the short interest in Europe. Matt Chessum, director in securities finance at S&P Global Market Intelligence, says: “[SBB] has been heavily shorted for the past 24 to 36 months and that is unlikely to change any time soon. The short interest around this [stock] is mainly due to the company being under pressure and its capital structure, rather than a target on the sector itself.”

Meanwhile, Peel Hunt real estate equity analyst James Carswell says the UK property sector “is coming out of the interest rate cycle in good shape, so we are optimistic that as rates reduce, the attractiveness of the sector will increase substantially – this is why short sellers’ interest [in UK REITs] is beginning to reduce as investors warm up to the sector”.

Short sellers’ interest in property has been partly a response to the higher-interest-rate environment of the past two years. In 2023, property deal volumes plummeted as liquidity was squeezed from the market amid interest rate hikes.

Towards the end of 2023, there was a consensus that rates would fall sharply in 2024 and the UK election wouldn’t upset the market, which led to a 30% real estate equity rally in Q4, as 2024 looked to be the ‘Goldilocks’ moment. But a worsened global macroeconomic and geopolitical situation has resulted in only a slight reduction in interest rates.

Sue Munden, head of Bloomberg Intelligence, EMEA, says: “We are going to have higher [interest rates] for longer. Interest rates in the UK are only expected to reach 4% by the end of 2025, which makes any massive contraction in property yields less likely.”

Higher rates affect financing

Real estate is also vulnerable to high interest rates as they increase borrowing costs, which can reduce profit margins for property firms that use debt to fund acquisitions. Oli Creasey, head of property research at Quilter Cheviot, says: “Higher interest rates impact debt financing, which can impact valuations and net income streams.”

However, debt refinancing has not been a significant issue for REITs in 2024, according to Creasey. One of the main reasons for this is that in the decade prior to 2023, when interest rates were low, many REITs took out long-term debt and have hedges in place.

For example, Landsec’s weighted average debt term is 10 years. So, while some refinancing will be required in 2027, most of its debt is much longer dated.

Chessum says of REIT refinancing: “In Europe, market participants were cautious, thinking there was potential for a blow-up, but the year went by without REITs experiencing massive credit issues.”

In an environment where rates are stable or being cut, we don’t necessarily want to short the sector
Guy Barnard, Janus Henderson Investors

Jackie Bowie, managing partner and head of EMEA at Chatham Financial, adds: “Some REITs have already managed to refinance portions of their debt. REITs generally won’t be beholden to one source of capital, as they tend to have multiple sources such as the public bond market, the private placement capital market and standard balance sheet lenders.”

While refinancing may not be a major problem for REITs, when interest rates are high, investors tend to favour fixed-income securities and bonds over REITs, which are often valued for their dividend yield, and this can lead to a downward pressure on stock prices.

Carswell says: “When interest rates rise, investors get a higher return on interest for cash in the bank or on a gilt. This is an easier option compared with going through the effort of owning and managing real estate.”

Meanwhile, the percentage discount between share price and net tangible assets (NTA) reflects how the market views a REIT’s value. Bloomberg Intelligence’s Munden says: “There are many [UK] REITs in the 30% to 35% range, which is about the current average.

“LondonMetric’s portfolio has a weighted average unexpired lease term of 19 years and is sheltered from inflation because many of its leases have inflation-linked uplifts. This means it is in a stronger position than most of its counterparts and may explain why the shares trade near its NTA.”

Creasey adds: “When I look at [UK] REITs, I see a cheap sector at the moment. Looking at it from an income perspective, there are decent earnings growth and a decent starting yield. So, I am bullish on the sector.”

Guy Barnard, co-head of global property equities at investment services firm Janus Henderson Investors, says: “We have seen a significant change in the past 12 months in terms of overall short interest [in REITs], particularly in Europe, which experienced a pivot of expectations at the end of last year.”

Improving sentiment

Barnard adds: “Part of the short-selling thesis is about [high] interest rates being bad for the sector, but if we are in an environment where rates are stable or being cut, then we don’t necessarily want to short the sector. My perception is that sentiment towards real estate is improving. But we are still very heavily correlated to the macro narrative and concerns about how far and how fast rates will reduce.”

Concerns that rates will fall at a slower pace in the UK can largely be put down to the Autumn Budget proposals to increase borrowing. This pushed 10-year gilt yields up around 20 basis points in the days after the Budget.

Barnard says: “As gilts have moved up, the [real estate] sector has come down, having built strong momentum, particularly through spring. Some of that momentum has been sapped in the wake of the UK’s Autumn Budget amid the uncertainty that it has created.

“Our base case is that we are still in a period of stabilisation in the underlying market, and values have bottomed out. The upside we were hoping for two to three months ago was that 2025 would be a year for increased capital growth. This now looks less certain.

“For us, it is now about a delay in recovery and growth, rather than our base case being that there will be another material lay-down [fall] in values. We still think we’re in that stabilisation phase, as we are seeing people rebuilding exposure to real estate and an increase in transactions.”

Hammerson tops list of most shorted UK stocks since 2020

Hammerson was the most shorted property stock over a four-year period, according to Property Week’s analysis of 26 property firms listed across the FTSE 100 and FTSE 250, based on S&P Global data.

The urban property owner, operator and developer had an average 11.55% of its market cap on loan over the past four years. It was also the third most shorted firm this year, with an average 2.34% of its market cap on loan.

Oli Creasey, head of property research at Quilter Cheviot, says he is surprised about the short-seller interest in the company, as it has been a “relatively strong performer” in the year to date.

When Rita-Rose Gagné was appointed as chief executive in November 2020, the firm’s share price was weak, at around 16p, but has since grown to around 29p today.

Its share price grew 15% in Q3 on a quarterly basis, and 26% on a yearly basis. It also posted a total return of 18% in the quarter – the fourth highest out of the firms tracked by Property Week.

Last month, Hammerson splashed £135m to take full ownership of Westquay shopping centre in Southampton by buying Singaporean sovereign wealth fund GIC’s 50% stake. The deal was funded by proceeds from Hammerson’s £1.5bn sale of its stake in Value Retail, the owner of Bicester Village, Oxfordshire.

Both deals followed pressure from shareholders to sell off valuable non-core operations to invest in its core business and were well received by investors.

Alan Carter, managing director and real estate special adviser at brokerage and investment firm Stifel, says: “Some hedge funds are still wary of the REIT sector in general so may just short the best performer.

“I also suspect there remains caution around the retail sector and the impact of the Budget on consumer expenditure, and even more so on consumer confidence. Given sales figures recently, that may prove to be right, although I still think prime retail will be largely unaffected.”

Similarly, Safestore and Primary Health Properties posted strong total returns in Q3, at 18% and 13% respectively, but were among the most shorted in the sample. This could indicate that strong companies attract the interest of short sellers because their head is above the parapet and investors might anticipate some reversion.

Increased short-seller interest in housebuilder Vistry is likely to be down to the announcement at the start of October that it would take a profit hit on a £115m cost overrun forecast over the next three years in its southern division.

The initial profit warning caused shares to drop 28% over the month, making it the biggest faller over that period. Prior to this, Vistry was a strong performer among housebuilders.

On 8 November, the housebuilder revealed that the discovery of further cost overruns would lead to a further £50m profit hit.