U.K. Real Estate Losses May Be Biggest in 25 Years (Update1)
By Simon Packard
Jan. 7 (Bloomberg) — LaSalle Investment Management put
Condor House, a seven-story office building facing Londons St.
Pauls Cathedral, on the market for 130 million pounds ($256
million) six months ago. The building sold last month for about
117 million pounds, 10 percent below the asking price.
Appraisal values fell at a record rate in November and
commercial real estate derivatives contracts indicate owners of
British offices, shopping malls and warehouses may suffer their
biggest annual losses in more than a quarter century.
“The U.K. market is falling apart, said Peter Hobbs,
London-based head of research at RREEF Real Estate, a Deutsche
Bank AG unit that manages about $100 billion. “Theres a risk
that this cyclical downturn turns into something worse.
Britains 700 billion-pound commercial property market will
perform worse in 2008 than the rest of Europe, the U.S. and
Asia, Hobbs said. The slide is accelerating as banks tighten
lending standards across the globe after losses of more than $90
billion from U.S. mortgage investments. Jones Lang LaSalle Inc.,
the worlds second-largest commercial real estate broker,
estimates transactions in the U.K. slumped 60 percent during the
final quarter of 2007 to about 5 billion pounds.
Building owners may record losses of at least 11 percent in
2008, according to prices of derivatives contracts pegged to
indexes compiled by London-based research firm Investment
Property Databank Ltd.
The decline would be the largest since IPD introduced its
annual total-return index in 1981, which combines data for
rental incomes and changes to appraisal values. The benchmark
index covers 200 billion pounds of investments and excludes
debt, which can multiply property gains or losses.
`Element of Hysteria
“Theres an element of hysteria in the market, said
William Hill, head of London-based Schroder Property Investment
Management, which oversees 10 billion pounds. As funds are forced
to sell buildings to meet investor redemptions, finding a buyer
at a high enough price is like “grasping an eel, he said.
Westfield Group, the worlds largest mall-owner, canceled plans
last week to sell the remaining 33 percent of the 530 million-pound
U.K. Shopping Centre Fund. The fund owns 25 percent of the shopping
centers in Belfast, Derby, Dudley and Tunbridge Wells.
British Land Co., the U.K.s second-biggest real estate
investment trust, abandoned efforts in October to sell a stake
in Meadowhall Shopping Centre on the outskirts of Sheffield in
northern England. It cut the value of the property by 79 million
pounds to 1.58 billion pounds a month later.
Appraisers lowered commercial values by an unprecedented 4
percent in November, increasing the cumulative 11-month decline
to 7.8 percent, IPD reported. In the last property crash, values
dropped 27 percent from 1989 through 1993.
Canary Wharf
Most investors say this slump is different from the 1990s,
when an economic recession, rising interest rates and oversupply
from the previous decades construction boom beset the market.
In the early 1990s, mounting debt and office vacancies led
to the bankruptcies of companies including Paul Reichmanns
Olympia %26amp; York Ltd., which began Canary Wharf. The business and
retail district now contains the U.K.s three tallest buildings:
One Canada Square, HSBC Tower and the Citigroup Centre.
British Land bought the Broadgate development next to
Liverpool Street railroad station in the City of London in 1996
after developer Rosehaugh Plc went bankrupt and partner Stanhope
Properties Plc encountered financial difficulties.
Unlike the 1989-to-1992 period, demand from new tenants is
“robust and rental growth trends are positive across most
markets, said Cliff Hawkins, who oversees UBS Asset
Managements 2.38 billion-pound Triton Property Fund.
`More Shocking
Commercial rents rose at an average monthly rate of 0.4
percent since the start of 2006, according to IPD, reflecting
the health of the British economy. A shortage in supply has
ensured London is the worlds most expensive location in which
to lease an office, agent CB Richard Ellis Inc. estimates.
The U.K. jobless rate is the lowest in more than 30 years
and the Bank of England reduced its benchmark interest rate last
month to 5.5 percent, half the average level of 1990 to 1992.
Values of shops, offices and warehouses peaked in the first
half of last year after the agreement by Spains Metrovacesa SA
to buy HSBC Holding Plcs headquarters at Canary Wharf for a
record 1.09 billion pounds in April.
British commercial property values last declined in 1995.
This time, the slide is “looking shorter, sharper and more
shocking than even we had expected, said Mike Prew, a London-
based analyst at Lehman Brothers Holdings Inc.
Real estate shares, the worst performers last year of 39
industry groups on the London Stock Exchange, trade at a 32
percent discount to net asset values, Prew said.
Fund Redemptions
New Star Asset Management Group Ltd. said Dec. 10 that the
value of the properties in its flagship 1.7 billion-pound
Property Unit Trust mutual fund dropped almost 18 percent since
July. To keep pace, it will switch from monthly appraisals of
values to “at least twice a month until the property market
returns to a more stable state.
Falling values are spurring investors to pull out of real
estate funds, forcing some to sell properties to meet redemptions.
At least five U.K. funds have placed curbs on investor withdrawals.
Friends Provident Plc, the British insurer thats carrying
out a strategic review of its operations, said last month that
investors wont be able to withdraw savings from its property
funds, giving it as much as another six months to sell buildings.
“Theres been a step change since October, said Patrick
Bushnell, head of European investment at Henderson Global
Investors. “People will expect a much sharper correction in the
value of funds.
Ripple Effect
Funds specialized in owning buildings incurred their first
losses in more than 14 years in the third quarter and then, in
October, property mutual funds suffered 158 million pounds of
net outflows, the first in almost four years. A month later,
redemptions increased to a net 495 million pounds.
“Further net outflows could result in funds being forced
to liquidate assets, which could potentially spark a spiraling
sell-off in the market, said Sally Collins, a senior adviser
at Bestinvest, which counsels British savers with more than 2
billion pounds of investments.
Kingspan Group Plc, Europes largest maker of flooring and
insulation panels, said last month that 2008 will be “more
challenging because of the slowdown in the U.K., where it
generates 60 percent of sales.
“The credit crunch has exacerbated the correction since
June and “its happened quite quickly, said Michael Brodtman,
head of U.K. valuations at CB Richard Ellis, the countrys largest
appraiser. “People look at risk completely differently now.
Bloodied Noses
Brodtman estimates capitalization rates, or rental income as
a proportion of a buildings value, rose by 75 basis points to 125
basis points in the second half of 2007. He declined to estimate
how declines in building values will affect the rate this year.
IPD calculates that average U.K. capitalization rates were
about 4.5 percent at the end of the first half. A basis point is
0.01 percentage point.
Shares of investment trusts and developers have already
been hurt by concern that the companies will incur losses.
Capital %26amp; Regional Plc slumped 75 percent last year, making
the London-based manager of real estate assets the U.K.s worst-
performing property stock. Its 27 percent stake in the 1.3
billion-pound Junction Fund, whose most valuable asset is the
Thurrock retail park near London, fell almost 24 percent in the
first 11 months of last year.
Financial District
Real estate investors still underestimate the economic
slowdown caused by higher borrowing costs and banks reluctance
to lend, according to Martin Allen, an analyst at Morgan Stanley
in London. He expects “further significant falls for shares
of U.K. property companies in 2008.
The credit crunch may cause financial-services companies in
London to cut 6,500 jobs and reduce bonuses by 16 percent,
according to data compiled by the London-based Centre for
Economics and Business Research Ltd.
British Land has yet to find tenants for its Ropemaker and
Leadenhall Building developments in Londons main financial
district, which are scheduled to be completed by 2011. The
companys shares tumbled 45 percent in 2007, exceeding the
average 39 percent decline for U.K. real estate stocks.
Derivatives pegged to IPDs total-return indexes indicate
owning a commercial building may not become profitable until
2011, prices quoted by Tradition Financial Services showed.
`Common Sense
Still, the U.K. may be too big for investors to shun for
long. Britain accounts for a quarter of Europes real estate
investment market.
Raymond Mould, a 66-year-old real estate investor, raised 248
million pounds in November in an initial public offering of London
%26amp; Stamford Property Ltd. to try to take advantage of lower prices.
Its the third company formed by Mould and his associates in the
past 30 years. They raised a combined 1.09 billion pounds from the
sale of Arlington Securities in 1989 and Pillar Property Plc in 2005.
ING REIM, which vies with RREEF as the worlds largest real
estate asset manager, plans a Global Opportunities Fund which
“may well look at the U.K. as a destination, whereas four
months ago it would have been too expensive, said Robert
Houston, chief executive officer of ING REIMs U.K. arm.
“Sentiment is playing an increasing amount in the pricing of
assets. We are in danger of it overriding common sense.
To contact the reporter on this story:
Simon Packard in London at
