Chaos in Washington and dollar weakness, combined with the Macron win, has had a major impact on markets. For a sterling investor, the global real estate sector is flat YTD, but the Americas is down 6% compared to Europe up over 8% including the UK up c. 7%. But the UK sector performance has been credible in spite of on-going Brexit concerns and only slightly underperforming the All Share up 7.5%. Results from British Land and Land Securities have been robust, particularly from Lands which is demonstrating good earnings growth even though it has been selling non-core assets and reducing its development exposure while remaining debt neutral ahead of an anticipated change in the demand-supply dynamic in the London market. Meanwhile, capital markets have been open with IPOs and equity issuance back on, including a PRS REIT, and more issuance from the Tritax paper machine. And for a dollar investor, the performance has been enhanced, with the UK showing a total return of over 12% YTD. The perennial bears of the UK sector must be feeling a touch uncomfortable!
London: a two-tier market
The London office market is proving resilient. The vacancy rate is gradually rising (4.7%) but the development pipeline keeps being deferred and the wave of potential new schemes which was concerning Rob Noel (CEO of Land Secs) two years ago keeps being pushed back (7msf deferred to date). However, a two tier market is emerging as the amount of second-hand space available increases and the weakness in Grade B space rents starts to come through. This has several implications; developers of good quality space at mid-market rents (Derwent and GPE lead the way) should continue to let space and see their development pipelines achieve good surpluses and profits, but investors in secondary assets with shorter leases and smaller suites may see values steadily decline, particularly in the City. As the investment banks start to relocate EU deal-makers to Paris and Frankfurt, the impact will become more significant. The question is whether this will provide an investment opportunity in repositioning Grade B into Grade A? I believe so, but I suspect the market leaders are happy to remain patient.