After an ‘apocalyptic’ 2022 for real estate investments, Goldman Sachs has waded into the debate and given its own assessment of prospects for the sector.
Commercial property stocks were the target of more heavy selling today as interest rate expectations and a broker downgrade combined to put another boot into valuations.
Shares in the blue-chip company, whose portfolio includes its Paddington Central joint venture and a 50% stake in the Meadowhall shopping centre in South Yorkshire, fell 17.3p to 381.6p. That compares with November’s disclosure of a net asset value of 695p a share and a share price level of more than 450p as recently as early February.
Other stocks under pressure in the FTSE All-Share included Piccadilly Lights owner Land Securities Group (LSE:LAND), which declined 16p to 597p, and shopping centre business Hammerson (LSE:HMSO) with a fall of 4% or 0.85p to 23.2p.
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Strain on the sector also reflected today’s unexpected spike in inflation, with a reading of 10.4% all but confirming a further interest rate hike at tomorrow’s Bank of England meeting and dashing the industry’s hopes that the peak may be near.
Higher interest rates have caused investors to demand a greater return from their investments, with real estate not immune from that.
In the case of British Land, its half-year property valuation declined 3% following yield expansion of 17 basis points, notably for lower yielding assets where the impact of rising interest rates has been most acute. The decline in property valuations was partly offset by rental growth in campuses, retail parks and urban logistics.
Chief executive Simon Carter said in November: “We do think yields will continue to move out, but based on what we're currently seeing, we believe the impact on values will be cushioned by rental growth in our markets.”
A note published a month ago by analysts at Liberum said the industry was ready for a reset after the “precipitous drop” in direct property valuations during the second half of last year.
Forecasting that declines will slow markedly in the first quarter as yields stabilise, Liberum said that the UK real estate investment trust (REIT) sector offered selective value through top picks Segro (LSE:SGRO), NewRiver REIT (LSE:NRR), Derwent London (LSE:DLN), CLS Holdings (LSE:CLI) and Hammerson.
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Its report noted that capital values declined 13% in the fourth quarter, close to the 14.3% fall at the height of the financial crisis in 2008.
Liberum added: “Declines in the second half of 2022 outpaced expectations across all segments, with almost two years of forecast declines occurring over six months. With peak interest rates in sight in the first half, we believe current pricing offers an attractive entry point for REITs and an opportunity to re-enter quality segments at rebased levels.”
Liberum said last month that it believed sheds, self-storage and student accommodation have the pricing power to drive superior rental growth. In contrast, office markets are expected to continue to face headwinds from higher vacancy rates.
In a note earlier this year, Bank of America described 2022 as apocalyptic for real estate and that 2023 represented a big macroeconomic call on rates and credit.
It said: “The tail of monetary tightening and soaring debt costs are likely to be tougher and last longer than most envisage in front of a steep debt maturity wall. The sector will likely remain in price discovery mode for most of the year. Prices and earnings still need to find a floor to reflect cap rates expansion and rising financing costs.”
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