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Expensive changes in the property world

The market is finding it difficult to assess the real value of property because of limited transactions. But the outlook for some sectors is gloomy.

The market is finding it difficult to assess the real value of property because of limited transactions. But the outlook for some sectors is gloomy.

Charles Stanley

in Features Fiduciary news


Late last year the M&G Property Fund was suspended to allow the mangers time to ensure orderly disposals to meet redemption requests from investors wishing to cash-in their units. The managers stated: “The assets owned by the M&G Property portfolio, such as office buildings and shopping centres, are held for the long term and take time to buy and sell, making it difficult to immediately meet sudden and sustained levels of redemptions”.

 This March, a number of other leading funds including Standard Life, Threadneedle Street and L&G were also suspended for a different reason, owing to valuers inserting a "market uncertainty clause " in their valuations. The funds reckon that, as their valuers are less sure about the proper value of their properties, it would be better not to buy or sell units based on these indicative values.

The suspensions continue on the grounds that there still have not been enough transactions in the underlying real-estate market to provide accurate values. The suspended funds need to review the suspension every 28 days and report on the situation. It is disappointing it is taking so long to come to a sensible view of what various types of commercial property are worth. Some valuers are now saying they can value certain types of property more realistically, such as industrials, but not all the types in these general portfolios.

REITs liquidity

The stock market has continued to express views on property values by offering buyers and sellers the chance to deal in the shares of property Real Estate Investment Trusts (REIT). The market has been able to take a view on how values of the underlying property are changing and has imposed discounts or premiums on the companies depending on what type of property they own and what the market thinks is happening to it.

As expected, retail property has fared the worst, with Hammerson REIT down 75% this year as people became more pessimistic about shop properties in the age of Covid. Land Securities down 45% and British Land down 40% have fared a bit better with more office property in their mix, whilst Segro with its concentration on industrial property has risen by 5%.

The two last quarter days have seen major interruptions in payment of rent, especially in the shop category. Store chains unable to trade at all have found it difficult to pay substantial rent in advance, and hope they can engage their landlords in discussion about future rental levels in the light of changed trading circumstances. Some office tenants are also now asking themselves how much office space they will need going forward, and do they need to diversify it into smaller units out of city centres to make access easier. In due course there will need to be conversion and redevelopment of marginal shopping space which may in turn require lower capital values of the existing shops to make the numbers work for the conversion.

The large falls in some of the quoted REITs reflects the way the stock market will tend to exaggerate the trends it sees. The companies have some financial gearing, which damages results when rental income falls, and are prey to larger discounts to asset value when people are pessimistic about future rental and capital value trends for their properties.

A choice

Investors have the choice with property of investing via REITs and Investment trusts where there is a market – but the discounts might widen a lot – or investing in longer-term funds where they may not be able to sell because the fund is suspended when the market falls. It is taking time for there to be enough transactions in the property market outside the preferred area of industrials to decide what the new level of values is.

Many of these considerations apply to overseas commercial property as well as UK. In many places around the world tenants have struggled to pay or have delayed paying their rents and are looking for cuts in the charges. There is also the question of Hong Kong.

Now the US has removed all the special arrangements Hong Kong enjoyed compared to China, and now the UK and Australia have offered homes for some people wishing to leave Hong Kong, it is possible we will see the decline of Hong Kong as an important Asian financial and business centre for non-Chinese businesses. Singapore, Seoul and Taiwan amongst others will be looking to attract enterprises and talent that might previously have turned naturally to Hong Kong. Shanghai hopes to lift the main prize for domestic stock market and banking activity. This is an additional worry for investors with holdings in Hong Kong property.

Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.

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