Landsec swings to loss as London office valuations drop

One of many UK’s high landlords has swung to a loss after an virtually 10 per cent drop within the worth of its Metropolis of London workplaces, in an early signal that greater rates of interest may set off a widespread industrial property downturn.

Land Securities on Tuesday reported a pre-tax lack of £192mn for the six months to the top of September, in contrast with a £275mn revenue in the identical interval final 12 months, because the valuation of its portfolio of nationwide workplaces and outlets fell 2.9 per cent to £10.9bn.

The steepest falls had been on the FTSE 100 landlord’s almost £2bn portfolio of Metropolis of London workplaces, which misplaced 9.7 per cent of their worth within the interval.

Mark Allan, chief govt, mentioned rising borrowing prices had modified the outlook for the sector.

“The fabric enhance in bond yields since March has began to place upward strain on property yields, principally for these property the place yields had been lowest,” he mentioned. “Within the sectors we’re in, this principally affected London workplaces.”

Rates of interest have been rising since late final 12 months, when the Bank of England moved the benchmark charge up from historic lows.

The next base charge has elevated the price of borrowing and made industrial property much less enticing to institutional buyers that may now maintain bonds with the same yield however decrease threat than workplaces or outlets. The outcome has been to push up property yields — which transfer inversely to costs.

Allan added that the outlook was more and more difficult.

“Many years of globalisation, fuelling progress and miserable inflation, have began to enter reverse, with rising geopolitical tensions including to dangers round power reliance and provide chains,” he mentioned.

Colm Lauder, an analyst at Goodbody, mentioned Landsec’s outcomes had given an early style of what’s to come back for industrial property house owners.

“The ache that’s coming by way of within the second half [of the year] goes to be considerably worse,” he mentioned. “The market has moved on a lot since September.”

The “mini” Budget put ahead by former chancellor Kwasi Kwarteng on September 23 and finally dismantled by his successor Jeremy Hunt accelerated a rise in property yields, as buyers began pricing in greater threat and expectations of additional rate of interest rises.

With the measures in that Funds now rejected and the market pricing in additional average inflation and a much less extreme enhance in borrowing prices than beforehand feared, the corporate’s share worth has risen by virtually 20 per cent prior to now month.

Nonetheless, underlying property values are more likely to proceed falling.

Lauder estimated that yields for prime industrial property property resembling high-grade London workplaces or city warehouses may transfer to five per cent, from a place to begin earlier this 12 months of shut to three per cent — implying rather more important drops in valuation than these revealed to date.

Landsec can be contending with comparatively excessive workplace emptiness charges of 12.2 per cent within the Metropolis of London, as companies take into account their post-Covid office wants.