One of many UK’s prime landlords has swung to a loss after an nearly 10 per cent drop within the worth of its Metropolis of London workplaces, in an early signal that larger rates of interest might set off a widespread business property downturn.
Land Securities 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 had been on the FTSE 100 landlord’s practically £2bn portfolio of Metropolis of London workplaces, which misplaced 9.7 per cent of their worth within the interval.
Mark Allan, chief government, mentioned rising borrowing prices had modified the outlook for the sector.
“The fabric enhance in bond yields since March has began to place upward stress on property yields, principally for these belongings the place yields had 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 price up from historic lows.
A better base price has elevated the price of borrowing and made business property much less engaging to institutional traders that may now maintain bonds with the same yield however decrease danger than workplaces or retailers. The end result has been to push up property yields — which transfer inversely to costs.
Allan added that the outlook was more and more difficult.
“A long time of globalisation, fuelling progress and miserable inflation, have began to enter reverse, with rising geopolitical tensions including to dangers round vitality 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 business property house owners.
“The ache that’s coming by 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 ultimately dismantled by his successor Jeremy Hunt accelerated a rise in property yields, as traders began pricing in larger 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 worth has risen by nearly 20 per cent up to now month.
Nonetheless, underlying property values are prone to proceed falling.
Lauder estimated that yields for prime business property belongings similar to high-grade London workplaces or city warehouses might transfer to five per cent, from a place to begin earlier this yr of shut to three per cent — implying far more important 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 take into account their post-Covid office wants.
