Analysts at investment bank Goldman Sachs have warned that prices for UK commercial property could fall by up to 20% after the government’s ‘mini’ budget last month triggered a steep rise in borrowing costs for landlords.
The analysts predicted prices are set to drop by 15-20% between June 2022 and the end of 2024 due to rising funding costs on the back of spiralling interest rates. They issued a gloomy outlook for a string of UK listed property companies, including Hammerson and British Land, the Financial Times reported.
The bank’s warning comes amid growing industry concern about the impact on UK commercial property of the turmoil in bond markets, rising interest rates and inflation.
The five-year swap rate used by commercial property borrowers has jumped from 1% a year ago to above 5%, and Goldman estimates that gross financing costs for the listed companies it covers will rise by about 75% over the next five years as a result of higher rates.
The mini-budget presented by UK chancellor Kwasi Kwarteng on 23 September sent shockwaves through the City and unleashed turbulence in the bond markets, resulting in a spike in bond yields. This impacts property yields, which normally offer a premium to government bonds.
Another concern is maturing debt. Sharp rises in borrowing costs will make it impossible for some owners to refinance their assets when existing loans mature, forcing them to sell, according to the Financial Times.
Meanwhile, many pension funds are seeking to liquidate assets to meet collateral demands.
While some have recently been selling off more liquid assets to raise cash quickly, many are now considering offloading entire holdings in property funds, according to market participants.
On Tuesday, UK investment manager, Columbia Threadneedle, said it was suspending dealing in its £453 mln (€516 mln) CT UK Property Authorised Investment Fund and its feeder fund to restore liquidity. The freeze followed similar moves by three other UK funds a week earlier.
Talk of a worsening mid-term outlook for European real estate circulated widely at the Expo Real trade show in Munich in early October.
Some reports suggested UK investment houses were seeking to offload property via off-market deals, underlining the sensitivity of funds being seen as needing to sell assets.
