Billions of pounds of taxpayers’ money blown on the HS2 scandal serves to demonstrate that a builder’s estimate is never more than half the real cost of any bricks-and-mortar work. Now an under-reported analysis of commercial property shows how difficult it is to even estimate the real value of real estate that has already been built.
London office blocks have lost nearly a fifth of their value - or 17.1% for those fond of specious precision - since last year, according to the French investment bank BNP Paribas. It adds that similar blocks in Berlin and Paris are priced 15% lower than they were a year ago and blames higher interest rates.
Working from home (WFH) must be another factor, with offices across Europe empty most Mondays and Fridays now that many workers have become TWATs, because they are only seen in the building on Tuesdays, Wednesdays and Thursdays. Meanwhil,e other forms of commercial property, such as retail and leisure, suffer from online competition.
No wonder the average investment trust share price in the ‘Property: Europe’ sector has collapsed to trade at an eye-stretching discount of 41% below net asset value (NAV), pushing the typical dividend yield up to 7.4%. Commercial property is certainly in the bargain basement, but is it really as cheap as it seems?
As the BNP Paribas analysis shows, NAVs are arguable and can be revised down sharply. Dividends are not guaranteed although, here and now, income payments are a matter of fact.
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Sad to say, so are the dismal total return statistics; the four investment trusts in this sector have shrunk shareholders’ capital by an average of 20% over the last year and 34% over the last five years. None of them has a 10-year track record.
Schroder European Real Estate Inv Trust (LSE:SERE) is the best of a badly-out-of-favour bunch over the medium term with shrinkage of just under 14% and 10% over the last year and five-year periods. High-quality office space and other commercial property in Paris (Saint-Cloud), Berlin, Hamburg and Stuttgart account for nearly half the total assets of £216 million and the market capitalisation of only £95 million yields dividend income of 9%, increased by an annual average of 6.8% over the last five years.
Tritax EuroBox Euro (LSE:BOXE) (stock market tickers: BOXE for the Euro-denominated equity; EBOX for sterling shares), the largest trust in this sector with more than €1.3 billion assets, leads this sector over the last year with 12% shrinkage, following a stonking 36% loss over five years. As its name suggests, this fund is focused on warehouses and distribution hubs necessary for internet shopping. While that shields it from the woes of empty offices, it has suffered from online retailing failing to deliver on the hype of five years ago, with prices falling and pushing the EBOX yield to 8.2% now.
Ranking third over the last year, abrdn European Logistics Income (LSE:ASLI), with total assets of £524 million, lost 20% over that period and 24% over five years. The latter and larger loss reflects this trust’s focus on formerly fashionable assets linked to online shopping. ASLI currently yields 7.6% income but, according to independent statisticians Morningstar, lacks a five-year record of consecutive increases.
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Closer to home, the Association of Investment Companies (AIC) ‘Property: UK Commercial’ has not suffered quite such a brutal reversal of fortunes, or fallen quite so far out of fashion. The average one, five and 10-year returns are minus 15%, minus 21% and a positive 10% respectively, with 7.4% dividend income, trading at a 26% discount to NAV.
AEW UK REIT Ord (LSE:AEWU), with its focus on smaller commercial properties, largely outside London, is the sector leader over the last year and five-year periods with total returns of 16% and 60%, yielding 8% income and trading 6.6% below NAV.
Ediston Property Investment Company (LSE:EPIC), the out-of-town retail park specialist, also delivered a positive return over the last year. But EPIC agreed to sell all its assets to a subsidiary of the American giant Realty Income Corp (NYSE:O) for £200.8 million earlier this month. The deal values EPIC at 72p per share, or 18% above its undisturbed price but 11% below its most recent NAV.
Worries that interest rates might remain higher for longer than many expected, raising property developers’ costs and reducing demand from buyers, add to the WFH conundrum and the risk that Europe’s worst war since 1945 might become even worse. News that Meta Platforms (NASDAQ:META), the owner of Facebook, has paid £149 million to escape from the lease on a London office block shows just how bad sentiment has become.
Expect to read much more about plunging commercial property values when pension funds, which are stuffed with these assets, mark-to-market. Against that dismal backdrop, only the brave will regard these shares as screaming bargains but at least decent dividend yields will pay us to be patient.
Ian Cowie is a freelance contributor and not a direct employee of interactive investor.
Ian Cowie owns shares in Tritax Eurobox (EBOX) as part of a globally diversified portfolio of investment trusts and other shares.
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