The fall in shares of property companies focused on the Central London office market, triggered by the UK vote to leave the European Union, is overdone and presents investors with selective buying opportunities, Green Street Advisors analyst Peter Papadakos told the annual conference of the European Public Real Estate Association (EPRA) in London on Wednesday.
'Public markets don’t always get it right and we disagree with the overly bearish stance on the Central London office market,' Papadakos said. 'Certainly, there are longer-term challenges, however REIT values currently price in a sharp Brexit-induced rental downturn that we don’t expect to materialize.'
Real estate investment trusts (REITs) with Central London office assets currently trade at a 15-20% discount to the present gross asset value of their portfolios. Green Street expects Central London offices owned by the REITs to drop in value by 10% in total by the end of 2018. This is less than current share prices imply, the real estate research firm said in its two latest European reports.
By contrast, the research firm said shares of Continental European listed companies are more aligned with estimated gross asset values, trading at about a 2% discount. While general prospects for rental growth in Continental Europe are better than in the UK, only select office markets will enjoy broad-based, double digit growth, Green Street Advisors predicts. These include Stockholm’s and Gothenburg’s CBD, Berlin, La Défense in Paris and Central Barcelona. Madrid and Milan will probably join their number in 2018, the advisor said.
Nordic companies and German resi are top picks
Diversified Nordic property companies and German residential operators are Green Street Advisors’ favoured sectors in Continental Europe. In the US, specialists in Central London investments, UK small cap companies and self-storage operators are currently among its top market picks because of the Brexit impact, which has left the UK listed property sector trading at an 8% discount to the estimated gross asset value of their portfolios.
Green Street claims the City of London and Docklands office markets are likely to be the hardest hit by the migration of certain services and companies to other EU countries as a result of companies losing their automatic passporting rights to the EU Single Market. In total, the research firm expects London to shed about 40,000 financial services jobs over the next five to seven years.
However, this will be largely offset by the diversified occupier market in London – notably strong take-up by the creative and technology sectors.
Moreover, UK REITs are slowing their Central London office development pipeline, meaning that although vacancy rates in the City of London will probably rise to about 9.7% in 2019 from 5.8% at the end of the first half of 2017, they are likely to then start receding, Papadakos said. Prime City of London rents will fall about 15% to about £60 a square foot, Green Street Advisors estimates, but more modest falls are expected in the West End office market.
'Europe’s yield compression story is largely over, so the returns from real estate will be lower than for the past three years,' Papadakos said. 'Assuming interest rates remain at current levels, we’re in a pretty benign environment and there are no red flags in terms of real estate pricing. We expect property values to stabilise or rise in Continental Europe, while in the UK they will stabilise or fall. Broadly, property values have a sufficient cushion to absorb higher interest rates, the fundamentals are still favourable for most real estate investment and the asset class remains attractive for income-hungry investors.'
