The number of listed real estate companies on the London Stock Exchange has hit its lowest level in more than two decades, with many of the remaining REITs now “uninvestable” unless consolidation continues.

There are 71 listed real estate companies in the UK, the smallest number since at least 2000, according to the equity analyst team at investment bank Berenberg.

Half of these REITs have a market capitalisation of less than £200m, which makes them ripe for consolidation, the team said.

Analysts Miranda Cockburn and Yudith Karunaratna said in a note: “There is nothing wrong with a small cap stock which is ambitious and wants to grow, but many are so small that they should be dissolved or taken private.”

The bank said companies with a market cap below £300m are likely targets, trading at an average discount to NAV of 40%, compared with 24% for those with a greater market cap. It identified 34 UK REITs that fell into the sub-£300m category.

Berenberg’s comments echo those of Marcus Phayre-Mudge, fund manager at TR Property Investment Trust, who told EG late last year that he expected further M&A activity around REITs with market caps of £200m-£500m, on the grounds that they are “just too small”.

“We think all these REITs that are sub-£500m market cap should be amalgamated,” he said in November.

“If you have lost that gravitational pull [between share price and NAV], you are what we call space junk, you are just sort of floating around out there,” Phayre-Mudge said, adding: “If the stock market is going to be too miserable about real estate and allow the share prices to drift to these big discounts to the asset value, then private capital will come in and take them out.”

Over the past five years there have been 30 exits from the LSE, Berenberg said, while the market has only seen two new entrants with the listings of Home REIT in 2020 and Life Sciences REIT in 2021. Exits were dominated by private equity plays and mergers, with nine of each. The rest were delisted, dissolved or taken private.

The spate of mergers has continued into early 2024 as two more major deals were agreed last month, with Custodian Property Income REIT and Abrdn Property Income Trust’s £1bn all-share merger and LondonMetric and LXi’s agreement to merge and create a new REIT with a market cap of £4.1bn and a combined portfolio valued at £6.2bn.

After agreeing the deal, Custodian Capital’s managing director, Richard Shepherd-Cross, told EG: “In markets where you can’t raise money because the share price and net asset value metrics don’t allow it, then consolidation through merger is another way to look at it. I think we have seized the opportunity rather than just being opportunistic.”