The Rise And Fall Of Home REIT – Are The Short Sellers Right?

By definition the price of a share on the market is the right price for that share on the market. That’s just what market price means – that’s the price. Which means that the short sellers in Home REIT (LON: HOME) are correct when they say it was overvalued at 120p, overvalued at 80p and is now correctly valued at 50p (OK, 49.68). But insisting on that tautology does give us the occasional problem – for example, if in December Home REIT is correctly valued at 50p then that value in August at 120p was also correct. We end up with a sort of Schroedinger’s share price for HOME which doesn’t aid us all that much.


The answer to that is that it is new information which changes prices – this is a corollary of the efficient markets hypothesis. Things that are known are already in the share price. So, it’s new information coming along which changes that share price. At any one time the HOME REIT share price is correct given what we know about what that Home REIT share price should be. When we know something new about HOME then that correct price changes.

We’re in danger of our tautology moving over into being an oxymoron here but the meaning behind this has value. What we’ve got to do to decide upon a trading position in Home – or any other stock, share or investment – is work out what the next pieces of information are going to be. For when those are incorporated into the market price that price is going to change dependent upon that information.

Now, Home REIT floated in Oct 2020 and has raised more funds since then with further share issues. The business is to buy up dilapidated housing, sort it out then rent it on – or lease it on – to charities and so on who then house homeless people in it. Funding has all been raised with that share price in the 100 to 120p range. So, the current collapse to 50p is painful. There’s been no grand upswing to lessen the pain of the losses.


To a certain extent a REIT shouldn’t move in this manner. The entire idea is that it will pay out 90% of profit in dividends (this gives it the tax privileges it has, not paying corporation tax) and so we would expect the share price to move more like a bond – with respect to the yield. But with a certain turbocharging, because we’re talking of profit share, not an interest rate. 

OK, so why has there been this collapse – and why is there now an 8.4% yield, which in itself is terribly tempting?

The answer being a short sellers report from Viceroy. To filet that to its essentials, there’s been overpayment for the properties – driven by speed of expansion plus the use of agents – plus the varied charities not being as long term secure as tenants as claimed. So, that yield is more fragile – even close to the dividend trap – than we should be happy with. At a 4% yield that might be true too.

Home REIT has responded, at length. So has Viceroy responded to the response. The FT has a more detailed listing of the to and fro here. The Times’ simpler explanation is here. 

So, to recap. Home REIT is built upon the idea that there’s a new money-making machine in town. Viceroy’s case is that the money-making ability of this machine is overstated. So far, so simple. That’s what explains the vehement changes in that market price as the new information gets absorbed into market prices. Cool.

Now, what we want to know is what happens next? One, and not hugely useful even if entirely and wholly true, answer is that we don’t know. Because we need that next piece of information which will change that market price. So, we have to take a view on what that next piece of information will be and then predict that new market price – which then leads to our being able to position ourselves ahead of the move to it.

If Viceroy and others are correct then the Home REIT price will be as it is or possibly lower. If Home is right, in that there are no such problems, then the price will rise back up again – 8% and above yields are too tempting for that not to happen. But it will happen slowly. For the Viceroy claims are that there’s a long-term problem in those leases. So, it’ll be the long term before we see whether they’re right or not.

The reason for the share price collapse at Home REIT is a claim about the long-term validity of those leases. Therefore, the working out of whether the claim is correct – or as HOME insists, is not – will take a long term to work out.


Tim Worstall is a freelance journalist who also used to be the world's leading scandium wholesalers (one of the rare earths). His Wikipedia entry gives a flavour.

Over the last two deca... Continued

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