Short sellers target UK real estate
19 March 2019
Sam Pierson of IHS Markit suggests that short sellers are targeting the UK real estate market as Brexit looms
Image: Shutterstock
The UK real estate sector has attracted an increase in short sellers, due to concerns regarding Brexit. Many of the real estate investment trusts (REITs) in this sector own retail assets, which are currently under pressure along with their tenants. The marginal change over the last month has increased short coverage for Debenham’s and Marks & Spencer—the most shorted UK retailers—however, we’re now seeing that short sellers are shifting focus towards the sector’s landlords.
Borrow demand for the UK real estate sector surged after the original Brexit vote, nearly reaching 5 percent of all UK equity short loan balances in October of that year. During that time, the sector’s loan balances grew by 40 percent, even though overall UK short loan balances only grew by 2 percent. The borrow demand was broadly based across the sector; the average percent of shares outstanding on loan increasing from 1 percent (before the vote) to 1.7 percent in November 2016. That was the high-water mark for general interest in shorting the sector, ahead of a two-year steady downtrend, which saw the average percent outstanding shares drop below 1 percent in early January of this year. A similar image is reflected in nominal short balances, which peaked at £1.5 billion in November 2016 before trending down, though a few constituent stocks did see increased balances in late 2017 and 2018.
For the first time since the summer of 2017, short loan balances in real estate stocks exceed 4.5 percent of the total for all UK equities. The year-to-date spike in that ratio is the result of both increasing demands for the real estate sector, and an overall decline in UK equity short loan balances. The current balance of £1.17 billion is the highest since May 2018.
Intu Properties currently has 11 percent of outstanding shares on loan, the most for any UK real estate stock and 11th for all UK equities. The £161 million in short loan balances are second most in the UK real estate sector, only behind the British Land Company with £218 million. The firm scorched short sellers last autumn when it announced a deal to take the firm private, which initially sent the share price soaring, and prompted over 100 million borrowed shares to be returned. When the deal fell apart in November, along with the announcement of a dividend cut, short sellers returned to the scene and have been adding to positions ever since.
Newriver REIT currently has 10 percent of outstanding shares on loan, the second most within the UK real estate sector. Short sellers have been adding to the position since the share price began its descent into a downtrend in late 2017. The 13 percent share price rally from the 27 December low has been met with increased borrow demand from short sellers, with the position reaching an all-time high in share terms, just over 30 million.
The anticipation of various potential Brexit outcomes is likely to take many forms. For equity short sellers, the real estate sector has become a popular means of hedging exposures or outright bearish views. Similar to the period following the Brexit vote, the divergence between the increase in borrowing of the real estate sector relative to broader UK equities reflects a view that this sector could underperform. With that being said, the best opportunities are often found in unloved sectors, as Brexit uncertainty looms UK real estate may fit that bill.
Borrow demand for the UK real estate sector surged after the original Brexit vote, nearly reaching 5 percent of all UK equity short loan balances in October of that year. During that time, the sector’s loan balances grew by 40 percent, even though overall UK short loan balances only grew by 2 percent. The borrow demand was broadly based across the sector; the average percent of shares outstanding on loan increasing from 1 percent (before the vote) to 1.7 percent in November 2016. That was the high-water mark for general interest in shorting the sector, ahead of a two-year steady downtrend, which saw the average percent outstanding shares drop below 1 percent in early January of this year. A similar image is reflected in nominal short balances, which peaked at £1.5 billion in November 2016 before trending down, though a few constituent stocks did see increased balances in late 2017 and 2018.
For the first time since the summer of 2017, short loan balances in real estate stocks exceed 4.5 percent of the total for all UK equities. The year-to-date spike in that ratio is the result of both increasing demands for the real estate sector, and an overall decline in UK equity short loan balances. The current balance of £1.17 billion is the highest since May 2018.
Intu Properties currently has 11 percent of outstanding shares on loan, the most for any UK real estate stock and 11th for all UK equities. The £161 million in short loan balances are second most in the UK real estate sector, only behind the British Land Company with £218 million. The firm scorched short sellers last autumn when it announced a deal to take the firm private, which initially sent the share price soaring, and prompted over 100 million borrowed shares to be returned. When the deal fell apart in November, along with the announcement of a dividend cut, short sellers returned to the scene and have been adding to positions ever since.
Newriver REIT currently has 10 percent of outstanding shares on loan, the second most within the UK real estate sector. Short sellers have been adding to the position since the share price began its descent into a downtrend in late 2017. The 13 percent share price rally from the 27 December low has been met with increased borrow demand from short sellers, with the position reaching an all-time high in share terms, just over 30 million.
The anticipation of various potential Brexit outcomes is likely to take many forms. For equity short sellers, the real estate sector has become a popular means of hedging exposures or outright bearish views. Similar to the period following the Brexit vote, the divergence between the increase in borrowing of the real estate sector relative to broader UK equities reflects a view that this sector could underperform. With that being said, the best opportunities are often found in unloved sectors, as Brexit uncertainty looms UK real estate may fit that bill.
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