Asset manager says UK property is now toxic, names British Land and Land Securities
The commercial property sector in the UK has become a “toxic environment” for investors, according to the chief investment officer of Plurimi Wealth. Patrick Armstrong told CNBC’s Pro Talks that the real estate sector is “sensitive” to rising interest rates, which he says will drive down property values and stock prices. Armstrong also revealed he was betting against British Land and Land Securities, two of the UK’s biggest property development and investment companies, by shorting their shares. Short sellers profit when stocks fall. They borrow shares to resell them immediately with plans to buy them back when the price drops to pocket the difference. “We are already in a recession in the UK. There is more office supply than demand, and working from home has taken away some of the demand for office space,” said Armstrong, who oversees more than 6 billion dollars of assets. “I think commercial property in the UK is in the most toxic environment you can imagine – higher rates, lower land values and no prospect of rent growth.” Shares of British Land and Land Securities have fallen 23.1% and 18.5% respectively this year. In comparison, the FTSE 100 index, of which the two companies are a part, rose by 4.65% over the same period. Unlike Armstrong, UBS equity analysts have a buy rating on both stocks. Additionally, the investment bank’s price target for shares of British Land and Land Securities offers upside potential of 17.6% and 9.2%, respectively. Neither company immediately responded to CNBC’s requests for comment. Real estate valuations, especially commercial properties, move inversely to their returns. Typically, these investments command a higher premium than the risk-free yields of government bonds. With UK government bonds yielding around 3%, commercial property valuations fell to offset rising yields above sovereign gilts. British Land is now offering a yield of 7.1%, one percentage point above its long-term average, according to UBS. The investment bank suggests that with every 0.5 to 1 percentage point increase in yield, values drop by 15 to 20%. The bearish sentiment is also echoed by economists at Capital Economics. But they expect the drop in values to be much less this time around than the drop seen during the 2007-2009 global financial crisis. “We estimate peak-to-trough declines of 10-15% in the UK and eurozone over the next year,” Andrew Burrell, chief property economist at Capital Economics, said in a statement. note to customers earlier this month. . However, Burrell thinks property prices in Europe will underperform, due to a relatively worse recession on the continent than in the United States. “In Europe, by contrast, the contraction is deeper, with output down 2% from peak to trough,” Burrell said, referring to the expected decline in GDP. “We also expect monetary easing to come later than in the United States, delaying the recovery in economic growth and real estate values.”
