Price pressures in commercial property
Earlier this month, thousands of European property investors arrived in Munich hoping to strike deals and share gossip over German lager, writes George Hammond in London.
But the mood at the Expo Real trade fair was “sombre”, according to Lisa Attenborough, head of the debt advisory team at estate agency Knight Frank, who attended.
While there is now near-consensus in commercial real estate crowds that property prices must come down, no one is sure how far they should fall. This has meant stasis in the market and frustration for professionals who earn their fees on transactional activity.
A sharp increase in borrowing costs — made sharper still in the UK by September’s “mini” Budget — has made it hard for valuers to price property and for banks to lend against it, said Attenborough.
Analysts at Goldman Sachs forecast that UK commercial property prices could fall by up to 20 per cent by the end of 2024. Rising interest rates have increased costs for owners of offices, shops and warehouses, just as they have homeowners looking to secure mortgages.
While there is less leverage in the market than there was before the financial crisis, big rises in borrowing costs will make it impossible for some owners to refinance when existing loans mature, forcing them to sell.
In a tumultuous market, with buyers chipping away at asking prices, landlords who can sit tight rather than sell are choosing to do so. But not everyone has that luxury.
And recent turmoil in the gilt markets is compounding the problem. It’s putting pressure on property funds to shift assets as investors accelerate their retreat from the vehicles to meet their own cash calls. The spike in gilt yields has forced pension funds running liability-driven investment strategies to sell off assets, including property fund holdings, in order to meet collateral calls.
A rush to the exits has forced fund managers, including Schroders, BlackRock and Columbia Threadneedle to suspend or delay redemptions from institutional real estate funds, at least until they can free up cash by selling property. And real estate investors are preparing for discount deals as property funds are pressed to sell off offices and warehouses.
But these sales could take months, and property funds will be hawking assets into a stuttering market. This is bad news for their investors and potentially a trigger for a marketwide doom loop of down-valuations.
“Buildings will trade, but at a lower price,” said one seasoned property investor. “The clearing price will have to be 30-35 per cent lower than in June this year.”