Commercial Property Values Suffer Drop

Potentially not a surprise, given the aftermath of the Covid-19 pandemic and the boom in people working from home or hybrid working, is the news that commercial property companies are being valued at their lowest since the global financial crisis in 2008.

Shares in London-listed landlords are reportedly trading at 24% less than their net asset value, according to data published by Morningstar.

Investors therefore believe that commercial property landlords value their properties at more than investors do.

In the last couple of years, commercial property values have fallen sharply in relation to higher interest rates. This has in turn pushed up property yields. Higher yields should then equal lower headline valuations.

As you might imagine, offices and shops have borne the brunt of this decline in values, given the uncertain futures for retail and offices, whilst we work out how many desks we need to accommodate for Brian who is WFH on a Tuesday-Thursday and Kaylee who only WFH on a Monday.

Landlords exposed to the office and retail sectors have been hit with the stock market’s scepticism. Shopping centre owner Hammerson and Great Portland Estates, a London office developer, are trading at 44% less than their net asset value.

Land Securities, one of the biggest landlords, and owner of Bluewater shopping centre in Kent, are trading at a 23% discount compared to their net asset value, and British Land are at 21%. Land Securities are said to be trying to move into “urban mixed-use regeneration”. British Land is trying to add more retail parks instead of shopping centres, but remains a big landlord of London offices.

Andrew Jones of LondonMetric, which owns billions of pounds’ worth of warehouses has said that “There’s no organic rental growth within the business because they spectacularly missed the two biggest trends to hit the UK real estate market in probably 50 years: beds and sheds.” LondonMetric is one of the few that is trading at a premium to their net asset value, along with Big Yellow, the storage group, and Unite, the biggest student accommodation landlord.

Equity investors are said to be reluctant to invest in listed landlords which offer steadier but smaller returns, when they would normally desire the higher risk and higher returns on offer when buying company shares. “If you own [a real estate investment trust (“Reit”)] over the long term, it gives you a property return and not an equity return,” one City analyst said. “Yet we haven’t been able to convince people who want real estate exposure that Reits are the right way to get that.”

American investors are said to be circling whilst they try and spot a deal. Lok’nStore are being bought for £400m and the world’s biggest private equity firm, Blackstone, bought Industrials Reit, a warehouse owner for £511m 12 months ago. American property investors are considered to be “more positive on the medium-term outlook” than others.