British Land Co. sees early signs that UK real estate values may be bottoming out after marking down the value of its portfolio by 12.3% to £8.9 billion ($11.1 billion) in the year through March. Its shares fell.
(Bloomberg) — British Land Co. sees early signs that UK real estate values may be bottoming out after marking down the value of its portfolio by 12.3% to £8.9 billion ($11.1 billion) in the year through March. Its shares fell.
Valuations have been hit by rising interest rates, which have pushed up yields on other assets, meaning investors in turn demand higher returns to justify the risk of investing in property. That’s been partially offset by rising rents even against a backdrop of anemic economic growth.
A series of rapid rates hikes has roiled UK commercial property, causing a sharp drop in deal making while investors wait for prices to adjust to the new environment. After a quiet first quarter there are signs that investment volumes are now increasing as confidence grows that the interest rate hiking cycle is near its end.
“Higher interest rates have inevitably had an impact on property market yields and, as a result, the value of our portfolio declined by 12.3%,” Chief Executive Officer Simon Carter said in a statement Wednesday. “Whilst we remain mindful of ongoing macroeconomic challenges, the upward yield pressure appears to be easing and there are early signs of yield compression for retail parks.
The company fell in early London trading and was down 4.3% at 8:28 a.m.
What Bloomberg Intelligence Says:
British Land’s share price, 36% below March net tangible assets, implies further cuts to its asset values appear likely, though the pace of attrition may slow as UK interest rates approach their peak.
— Sue Munden, BI real estate and REIT analyst
British Land’s estimated rental values are up 2.8%, the company said in a statement reporting its full-year results. A shortage of the best new office space with top environmental credentials is supporting rents in the company’s office campus business in London.
Overall the company leased 3.4 million square feet of space across its portfolio last year at rents 15.1% higher than expected.
The landlord, which has traditionally focused on offices and stores has made a recent pivot into so called urban logistics — warehouses close to population centers. That sector had been red hot as investors bet on a major shortage of space as online retailers compete for facilities that can enable them to cut delivery times, meaning valuations reached record levels.
The sharp rise in rates has hit the sector hard and British Land’s urban logistics portfolio declined by 24% in the period. But rents continue to rocket higher for the little space available and British Land said its urban logistics rents were 29.4% higher, partially offsetting the impact of rising rates.
“The impact on land values has been quite hard,” Carter said in an interview. “But the rental growth has been even better than we expected.”
(Updates with share price move in the fifth paragraph, urban logistics performance from the eighth paragraph and CEO comment in the final paragraph)
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