EPRA: Brexit-led overselling of UK REITs has created buying opportunity

Discounts on UK real estate investment trusts (REITs) are now “overdone” – particularly in relation to London offices – and there are now selective buying opportunities in the sector, according to Green Street Advisors.

At the European Public Real Estate Association’s (EPRA) annual conference in London, Peter Papadakos, managing director at Green Street Advisors, said: “Public markets don’t always get it right and we disagree with the overly bearish stance on the Central London office market.

“Certainly, there are longer-term challenges; however, REIT values currently price in a sharp Brexit-induced rental downturn that we don’t expect to materialise.”

He predicted office vacancy in the City of London would peak at 10%, compared with the 5-6% seen today.

REITs with Central London office assets are currently trading at a 15-20% discount to their present gross asset value, the firm said.

Central London offices held by the REITs are likely to drop 10% in value by the end of 2018, which is less than the falls of up to 20% current share prices imply, Green Street Advisors said.

Papadakos said the firm expects around 40,000 financial services jobs to disappear from London in the next five to seven years as a result of companies losing their automatic passporting rights to the single market, with these posts migrating to other parts of Europe.

But at the same time, creators of technology were creating jobs in London, he said.

Meanwhile, the supply pipeline of office space in London over the next four years was actually decreasing; construction schemes due to complete in 2021 were now being delayed or cancelled.

“There’s a dynamic element to it and we should not forget that,” he said.

Green Street said shares of Continental European listed companies are more aligned with estimated gross asset values than their UK counterparts, with these securities trading at about a 2% discount. 

Although in general, rental growth prospects are better in continental Europe, there are only a few office markets that will see broad-based growth of 10% or more, the firm has forecast.

These markets included the central business districts of Stockholm and Gothenburg, Berlin, La Défense in Paris and Central Barcelona. Madrid and Milan are expected to join the list next year.

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