According to one of the UK’s largest landlords, the values of prime London office buildings are “close to bottom” following a tough year for investors in commercial property.
British Land boss Simon Carter warned that the value of high-quality London office buildings should stabilize after recent sharp drops, but warned more pain would be coming for less desirable properties.
He said: “I think that we are near the bottom of London offices and our portfolio in particular.” “You’ll see that secondary office values will continue to fall.”
The FTSE100 group reported on Wednesday a 12-percent annual decline in the value of their £9bn Portfolio, which includes significant holdings in and around Broadgate in City of London as well as Paddington. The value of its City properties dropped by almost 15% in the year up to March.
British Land’s valuation decline led to a PS1bn loss before tax, down from more than £900mn in profit the previous year. The group’s underlying profits, which exclude property valuation swings from their calculations, increased by almost 7 percent to £264mn. Like-for-like, net rental income also increased by 6 percent.
After the results, shares of British Land fell by 5 percent.
Carter said that the fall in property values was due to the dramatic rise in interest rates, which central banks have been trying to contain inflation. He believes that the value of British Land’s portfolio will stabilise or even improve, in certain sectors, due to rising rents and a strong demand for well-located, modern space.
British Land signed new leases in 2017 for 3.4mn square feet of space, with rents that were 15 per cent more than their estimated value at the beginning of the financial period. Carter stated that the retail parks of the company, in particular, would increase in value. The occupancy rate was at its highest in 15 years, at 99 percent, and rents rose for the first four years.
Landsec, a rival FTSE 100 property owner, reported a smaller decline in property values of around 8 per cent on Tuesday. Colm Lauder said that “most sectors and properties types in both portfolios have reached a level where we see prime assets bottoming out, especially London offices and logistic.”
He added that “With transactional evidence so thin on the UK market, increased deal flow will be needed to confirm these trends.”