Landlords owning some of central London’s most valuable real estate, a haven for investors for the past five years as they sought to combat record-low interest rates, have fallen into the grip of the bears.
Land Securities Plc, Workspace Group Plc and British Land Plc, declined more than 24 percent in London trading since October 28, when the FTSE 350 Real Estate Investment Trust Index reached its highest level since January 2008. That compares with an almost 14 percent decline for the broader FTSE 350 Index.
Slumping commodity prices, emerging-market turmoil and an increasing supply of office space are damping demand for property, even though asset values have yet to fall. The amount of cash sovereign wealth funds have available to spend on real estate investment and development in central London dropped by 2 billion pounds to 16 billion pounds from May through November, according to CBRE Group Inc.
“London is becoming a victim of its own success as the petro-dollar trade unwinds, with SWFs selling assets,” said Mike Prew, an analyst at Jefferies Group LLC. “Rents are becoming unaffordable and there’s uncertainty over the currency because of the Brexit referendum.”
British Land and Workspace declined to comment on the shares slump. Land Securities did not immediately reply to requests seeking comment.
Tax changes and new lease accounting rules, which will bring assets and liabilities onto the balance sheet of the occupier, may affect investor demand for property, Prew said. The new rules are likely to reduce lease lengths, which lowers demand for property as investors seek to avoid the risk of empty buildings.
Land Securities Chief Executive Officer Rob Noel told the Evening Standard newspaper last month that a vote to leave the European Union would cut demand for office space in central London. U.K. Prime Minister David Cameron has pledged to hold a vote on Britain’s membership of the 28-nation bloc. That may take place as early as June.
While the so-called Brexit vote will create uncertainty, occupier demand remains good for available office and retail space, particularly in the West End market, Great Portland Estates Chief Executive Officer Toby Courtauld said on Wednesday.
The fall in the oil price has limited demand from the Middle East, although other buyers are still in the market, said Hemant Kotak, an analyst at Green Street Advisors. “The fundamentals are not nearly as bad as suggested by the selloff in property stocks,” he said.
Norway’s $810 billion sovereign wealth fund, the world’s biggest, is still interested in buying London properties, despite the risk of the U.K. leaving the EU, according to the CEO of real estate at Norges Bank Investment Management. However, if Britain does quit there’s a possibility the fund might “be less inclined to do the transactions that are highly dependent on the financial sector,” Karsten Kallevig said in an interview on Thursday.
London properties generated a total return, a combination of rental income and capital value gains, of 97 percent in the five years through December, according to data compiled by MSCI Inc. Investment-grade bonds in euros returned about 27 percent during the period, while similar notes in pounds returned about 41 percent, Bank of America Merrill Lynch index data show.
Property shares have also outperformed the stock market as a whole during that period. The FTSE 350 REIT Index has gained 38 percent with Workspace, a London-based flexible office provider, leading gains after its shares surged more than 200 percent. The FTSE 350 Index fell about 2.8 percent in the same period.