Originally published October 2022.

But this writer believes there’s plenty of hope for landlords.

The sector had a tawdry H1 with significant underperformance against the All Share Index for all the obvious reasons. As interest rates have risen sharply, the major concern has been that borrowing costs for the sector are now higher than the initial yields on many REITs portfolios, implying an upward ‘re-basing’ of property yields with a commensurate reduction in portfolio values. However, with mixed messaging from the Fed and other national banks, the UK sector has staged something of a rebound over a quiet summer. Having been down by 20% at theend of June, the sector is currently down a less embarrassing 13%. Investors are looking through the current interest rate cycle and putting their faith in inflation being brought under control at some point within an investable time horizon and if it’s the rising cost of capital that drove the sector down, then the hope is the opposite may be true.

The summer months are normally subdued and this year is no exception. A number of investment transactions in the direct market, notably in the logistics sector, appear to have either stalled or been put on hold with a pricing standoff between ambitious sellers and chipping buyers with a better feel for pricing perhaps being established when the holiday season is over. Some commentators have suggested there are echoes of 2007/8 and this prompted a brief but meaningful sell-off right at the end of the half year. I certainly don’t see that. Lessons have been learned. Back then the loan-to-values across the sector were above 50% ahead of capital values, falling by over 40% in a calendar year. At the simplest level, the UK sector now has about a 27% LTV, a current average debt cost of 2.5% with a seven-year average duration and nearly 80% of total debt costs fixed. It could be a lot worse of a position.