The real estate industry faces “a ‘higher for longer’ interest rate environment”, the chief of one of Britain’s largest landlords has warned, as the value of its portfolio dropped.
Landsec chief executive Mark Allan said on Tuesday that a decade of ultra-low interest rates had been an “aberration” and property investors should not “hope that markets will just ‘return to normal’ and interest rates come back down sharply if we wait long enough”.
The drop in the value of Landsec’s portfolio was led by City of London offices, which fell 15 per cent in the year. West End offices, which include the company’s large holdings around Victoria station, slipped 8 per cent.
The group swung to a £622mn pre-tax loss in the year to the end of March as the overall value of its £10.2bn portfolio of largely office and retail property declined 7.7 per cent.
Commercial property values and dealmaking have slumped in recent months as the market has reckoned with the fallout from the UK’s autumn “mini-Budget”, an economic slowdown and rapidly rising debt costs.
The adjustment to higher debt costs has been painful for a commercial property sector that relies heavily on borrowing. Allan said that some investors had overindulged in super-cheap debt. “Those business models where you could borrow cheaply and pay more for an asset . . . those times I think are very clearly behind us,” he added.
Despite the fall in the value of Landsec’s portfolio, Colm Lauder, analyst at Goodbody, said the group was a “notable outperformer” against an average drop of 19 per cent across UK portfolios.
Landsec has said the overall demand for offices will shrink post-Covid. The reduction could be as much as 20 per cent for “conventional” office space in “big headquarters-type buildings”, Allan said.
However, the company reported robust demand for the high-end, energy-efficient buildings it owns. Higher construction and debt costs will probably mean developers won’t build enough of those desirable buildings in central locations over the coming years, Allan said. Tenants are often adopting a “long four-day week” and are planning for the “maximum space they need, not the average space”, he added.
Landsec reported 6 per cent growth in like-for-like net rental income. Earnings per share, adjusted to take out valuation changes and some one-off items, rose 4.4 per cent. “Despite the challenging, but largely expected, valuation performance, [Landsec] continued to demonstrate the solidity of its cash flows,” said Numis analyst Max Nimmo.
The company sold £1.4bn of mostly City offices during the year, including Deloitte’s office at One New Street Square, as it sought to reduce debt and free up cash for new investments. Allan said the company had more to sell, but would probably “be turning buyer” by the end of the year.
