One of many UK’s prime landlords has swung to a loss after an virtually 10 per cent drop within the worth of its Metropolis of London workplaces, in an early signal that greater rates of interest may set off a widespread industrial property downturn.
Landsec on Tuesday reported a pre-tax lack of £192mn for the six months to the tip of September, in contrast with a £275mn revenue in the identical interval final yr, because the valuation of its portfolio of nationwide workplaces and retailers fell 2.9 per cent to £10.9bn.
The steepest falls have been on the FTSE 100 landlord’s almost £2bn portfolio of Metropolis of London workplaces, which misplaced 9.7 per cent of their worth within the interval.
Mark Allan, chief govt, mentioned rising borrowing prices had modified the outlook for the sector.
“The fabric enhance in bond yields since March has began to place upward strain on property yields, principally for these property the place yields have been lowest,” he mentioned. “Within the sectors we’re in, this principally affected London workplaces.”
Rates of interest have been rising since late final yr, when the Financial institution of England moved the benchmark fee up from historic lows.
A better base fee has elevated the price of borrowing and made industrial property much less enticing to institutional buyers that may now maintain bonds with an analogous yield however decrease danger than workplaces or retailers. The consequence has been to push up property yields — which transfer inversely to costs.
Allan added that the outlook was more and more difficult.
“Many years of globalisation, fuelling development and miserable inflation, have began to enter reverse, with rising geopolitical tensions including to dangers round power reliance and provide chains,” he mentioned.
Colm Lauder, an analyst at Goodbody, mentioned Landsec’s outcomes had given an early style of what’s to return for industrial property house owners.
“The ache that’s coming via within the second half [of the year] goes to be considerably worse,” he mentioned. “The market has moved on a lot since September.”
The “mini” Price range put ahead by former chancellor Kwasi Kwarteng on September 23 and finally dismantled by his successor Jeremy Hunt accelerated a rise in property yields, as buyers began pricing in greater danger and expectations of additional rate of interest rises.
With the measures in that Price range now rejected and the market pricing in additional average inflation and a much less extreme enhance in borrowing prices than beforehand feared, the corporate’s share value has risen by virtually 20 per cent up to now month.
Nonetheless, underlying property values are prone to proceed falling.
Lauder estimated that yields for prime industrial property property resembling high-grade London workplaces or city warehouses may transfer to five per cent, from a place to begin earlier this yr of shut to three per cent — implying far more vital drops in valuation than these revealed to date.
Landsec can be contending with comparatively excessive workplace emptiness charges of 12.2 per cent within the Metropolis of London, as companies think about their post-Covid office wants.
