UK Real Estate - Ugly headlines coming
Potential 4% monthly decline in UK property "worst since December 2008"
We've spoken to a number of valuers and UK REITs and believe the upcoming IPD (commercial property
index) release could show a c.4% decline in property values at the 'All Property' level in July. This is likely
to be heaviest in City offices (-6%?), and lightest in Industrial. If correct, this would make it the worst
monthly decline since December 2008, leaving the sector vulnerable to sensationalist headlines. This
could start as early as this Monday (8th Aug) as we understand CBRE will release its own index
information to the press then.
We've got 15% falls in our numbers – more than enough
In our 8 July note Pricing in a severe downturn, we pencilled in 15% declines to UK asset values over the
coming 12 months, but thought the market was pricing in c.30% falls, hence we saw value. Sentiment
has improved since then, and our 15% decline now looks 'more than enough', but it is still too early to
tell. We estimate that the large UK REITs trade at levels that imply a 16% fall in values (GAV discount of
16%), hence our bias remains positive, but we continue to expect volatility to come.
Why -4% and why it's not the start of a trend?
The July index will include the impact of the retail funds selling into a weak market. While transactional
evidence remains thin, a number of deals have cleared at discounts, including Aberdeen's sale of 10
Hammersmith Grove, reportedly 11% below asking. Subsequently, selling pressure across the retail
funds has abated as outflows have stemmed and downward value adjustments have been narrowed.
Hence, the magnitude in July is likely a one-off, although values could continue drifting down.
Roadmap for coming months: September will be key
The CBRE index will be published this Tuesday (9 Aug), but the information will likely be released to the
press on Monday. The IPD index will then follow on Friday 12 Aug (3pm). We anticipate the following
release (for August) will be relatively benign, given the summer holiday slowdown. However, a number
of property deals are being readied for September, which could prove a busy and decisive month, so may
be the best gauge of the new 'clearing price'. We therefore expect news flow in September, and the
September index releases (e.g. IPD on 17 October) to be of increased importance.