With plummeting prices, is commercial real estate an opportunity?

With plummeting prices, is commercial real estate an opportunity for investors or a trap? Not so hot property

The future looks increasingly bleak for shopping malls, offices, supermarkets and warehouses. Signs for sale are posted on the doors and windows of some premises and buyers are looking for deep discounts.

No wonder since Goldman Sachs predicts that by 2024, the value of these properties could be 15 to 20% lower than they were this summer.

These declines will be exacerbated by the adverse effects of the mini-budget.

Gloom: In the UK, many commercial property investors have already headed for the exit

Other analysts are even gloomier, pointing to the depressed mood elsewhere in Europe as the era of easy money fades into memory. The Stoxx 600 Real Estate index is down 44% this year. This index includes the British giants British Land, Segro and Land Securities.

Other constituents include the French operator of shopping centers UnibailRodamco-Westfield, the Swedish giant Sagax and the Swiss group PSP. In the UK, many commercial property investors have already headed for the exit. If you’re considering joining the queue, saying goodbye can be painful. For example, the shares of the UK Commercial Property REIT (real estate investment trust) are at a 49% discount to the value of its net assets.

Abrdn Property Income is given a 50% discount, underlining analyst group QuotedData’s assessment that the sector is facing “the perfect storm”.

You might also discover that the exit is blocked, with some funds being “closed” like in 2016 after the Brexit vote and also in 2020. Suddenly people remember the remarks of the former Governor of the Bank of England, Mark Carney (pictured) that funds that invested in illiquid investments but offered daily trades were ‘built on a lie’.

These conditions may excite some long-term opportunity seekers, especially since trust dividend yields are 6% or higher. The Supermarket Income REIT, which aims to provide an inflation-linked return, has a yield of 6.11%, for example. While I applaud the long-term approach to investing, it’s essential to face reality.

Stock prices tend to rebound in anticipation of a recovery. The price of commercial real estate, on the other hand, depends more on its appeal as a place to shop or store – it is also much more difficult to sell a building than a stock. Jason Hollands of Bestinvest said: “If you are an investor in an illiquid asset class such as commercial real estate, this is going to be a very uncomfortable time.”

Why such discouragement? Declining consumer confidence and declining occupancy rates in offices ill-equipped for the more flexible post-pandemic work style are partly to blame.

Not only do the consequences of the mini-budget continue to be felt, but there are also fears that the tax hikes ordered by Chancellor Jeremy Hunt could cause a deeper recession than expected. Hunt’s intervention may have slowed the surge in gilt yields precipitated by his predecessor’s actions.

Former Governor of the Bank of England: Mark Carney

Former Governor of the Bank of England: Mark Carney

But some pension funds caught up in the LDI (liability-driven investing) scandal are now eager to divest themselves of their real estate assets.

The higher yields on gilts have also made the income offered by commercial properties less attractive than when interest rates were at their lowest.

Debt levels may not be as high as at the height of the pandemic or at the time of the global financial crisis, but there could still be forced sales of properties.

Some fund managers, however, feel they are in a good position to exploit a sell-off.

Laura Elkin, manager of AEW UK REIT, said: “Our current portfolio is strongly positioned to withstand the challenges posed by current conditions.”

These views could persuade some investors in real estate funds and trusts to stay the course and others to bet on a turnaround. But they should be aware that this process will be long and uncomfortable.


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