For London's Real-Estate Owners, New Brooding on Brexit
21 February 2017 - 11:29PM
Dow Jones News
By Olga Cotaga and Art Patnaude
U.K. property companies are preparing for a downturn by stepping
up sales and stalling development plans.
Britain's decision to leave the European Union has exacerbated
concerns that property values are due to fall after years of gains.
Even before the so-called Brexit vote, property chiefs and analysts
had been warning the bull market for U.K. commercial real estate
was coming to an end.
"People are waiting for a falloff in property values," said
Hemant Kotak, an analyst at Green Street Advisors, a real-estate
investment trust tracker. REITs, which own and often operate
income-generating real estate, are still being "much more
cautious."
The U.K. experience mirrors the U.S., where investors also have
been cutting back on commercial property holdings, betting the boom
in commercial real estate that followed the 2008 financial crisis
is coming to an end.
Great Portland Estates PLC, which focuses on London office
development, earlier this month sold the new U.K. headquarters of
Facebook Inc. for GBP435 million ($543 million). The deal brought
Great Portland Estates' loan-to-value ratio to 11%, one of the
lowest debt levels in the sector.
In theory, companies with little debt are better positioned to
take advantage of a market downturn because they have capital on
hand to pounce on discounted properties.
Before the 2008 financial crisis, publicly traded U.K. REITs had
significantly higher debt levels than they do now. When the crisis
hit and property values plunged, some of the biggest firms had to
raise equity to stay afloat.
But the level of preparedness at publicly traded REITs, among
Britain's biggest property owners, is starkly different this time
around, analysts said.
Great Portland, for example, had a loan-to-value ratio of nearly
45% in 2008, according to Green Street. Land Securities PLC, the
U.K.'s biggest listed landlord, has an LTV of around 23% now,
versus more than 50% in 2008.
With a lower LTV companies don't feel as much pressure to sell
properties at discounted prices.
At 420,000 square feet, One Rathbone Square was Great Portland's
biggest development. Facebook is set to move into its new
headquarters in the coming weeks. Great Portland signed the 15-year
lease with Facebook in 2015.
Great Portland sold Rathbone Square to a joint venture between
German property firm Deka Immobilien and WestInvest, a capital
management company part of Deka Group, for 4% less than its
valuation last September. This discount was on par with the drop of
London real estate after Brexit.
Brexit has increased concerns that rents also could start
falling. Prime office rents in London's West End fell 6.3% in the
fourth quarter of 2016, while rents stalled in the main financial
district, known as the City, according to property broker CBRE.
Extra caution still hasn't helped share prices.
Real estate was one of the hardest-hit sectors after Brexit,
with REIT share prices falling by as much as 20% in the weeks
following the vote. While the impact of Brexit has been less severe
than some had predicted, share prices on average remain down around
10% from before the vote, a signal investors believe property
values have still have a way to fall, analysts said.
Shares of U.K. REITs are trading at roughly a 15% discount to
the gross value of their assets, according to Green Street.
Investors remain hesitant to buy because they have a "lack of
clarity whether this is the start of a slowdown," said Caroline
Simmons, deputy head of U.K. investment at UBS Wealth
Management.
Analysts are divided on whether the discounts make REITs worth
buying.
Some real-estate companies "seem cheap," said Mike Prew, an
analyst at Jefferies International. However, "we don't think they
are good value" given the risk of a downturn.
Mr. Kotak at Green Street is more positive. Right now share
prices aren't giving REITs any credit for low leverage, positive
development opportunities, or the strength of management teams.
"So you could argue there's some relative value here," he
said.
Write to Olga Cotaga at Olga.Cotaga@wsj.com and Art Patnaude at
art.patnaude@wsj.com
(END) Dow Jones Newswires
February 21, 2017 07:14 ET (12:14 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
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