Landsec teeters on loss as valuations for London offices drop

One of the UK’s largest landlords has taken a hit after a nearly 10 per cent drop in the value of its City of London offices, an early sign that rising interest rates could lead to a widespread downturn in commercial property.

Landsec on Tuesday reported a pre-tax loss of £192m for the six months to the end of September, compared to a profit of £275m in the same period last year, as the valuation of its portfolio of national offices and shops fell 2.9 per cent. to 10.9 billion pounds sterling.

The biggest falls were in the owner’s FTSE 100 portfolio worth around £2bn of City of London offices, which lost 9.7 per cent of its value in the period.

Mark Allen, chief executive, said higher borrowing costs changed the outlook for the sector.

“The material increase in bond yields since March began to put upward pressure on real estate yields, especially those assets where the yield was lower,” he said. “In the sectors we are in, this has mainly affected the London offices.”

Interest rates have been rising since late last year, when the Bank of England raised its benchmark interest rate from historic lows.

The higher prime rate increased the cost of borrowing and made commercial real estate less attractive to institutional investors who could now own bonds with a similar yield but lower risk than offices or stores. The result has been increased real estate yields – which move inversely with prices.

Allan added that the outlook is getting tougher.

He said, “Decades of globalization, which fueled growth and lowered inflation, have begun to reverse, with escalating geopolitical tensions increasing risks related to dependence on energy and supply chains.”

Landsec’s findings gave an early idea of ​​what’s to come for commercial property owners, said Colm Lauder, an analyst at Goodbody.

The pain that comes in the second half [of the year] It will be much worse,” he said. “The market has moved a lot since September.”

A “mini” budget introduced by former chancellor Kwasi Quarting on September 23 and eventually resolved by his successor Jeremy Hunt has accelerated the rise in real estate yields, as investors begin to price in higher risk and anticipate more rate hikes.

With measures in that budget now dismissed and the market pricing in milder inflation and a less steep increase in borrowing costs than previously feared, the company’s share price has risen about 20 percent in the past month.

However, underlying property values ​​are likely to continue to decline.

Lauder estimated that yields on key commercial property assets such as high-quality London offices or urban warehouses could move to 5 per cent, from a starting point earlier this year of close to 3 per cent – implying much larger declines in valuation than those disclosed. about her. Until now.

Landsec is also facing relatively high office vacancy rates of 12.2 per cent in the City of London, as businesses reflect on their post-Covid workplace needs.

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