Goldman Sachs has warned that billions of pounds could be wiped off the value of UK commercial property because of the sharp rise in borrowing costs following the government’s “mini” Budget.
Analysts at the bank published a gloomy outlook for a string of listed property companies, including Hammerson and British Land, and said they now anticipate prices across UK commercial real estate will fall between 15 and 20 per cent between June this year and the end of 2024.
The bank’s warning adds to growing alarm that UK commercial property is heading for a painful price crash. Rising interest rates have increased costs for owners of offices, shops and warehouses, just as they have homeowners looking to secure mortgages.
From about 1 per cent a year ago, the five-year swap rate used by commercial property borrowers has now soared above 5 per cent. Goldman estimates that gross financing costs for the listed companies it covers will rise by about 75 per cent over the next five years as a result of higher rates.
Higher borrowing costs also pose a problem for banks, which are struggling to gauge the effect on property values and are more hesitant about lending as a result, according to Lisa Attenborough, head of the debt advisory team at estate agency Knight Frank.
At the Expo Real European property conference in Munich last week, the mood on the conference floor was “sombre,” said Attenborough.
Investors, agents and property owners highlight two potential triggers for a drop in prices: maturing debt and a sell-off by pension funds that need to liquidate assets because of recent market turmoil.
While there is less leverage in the market than there was before the financial crisis, big rises in borrowing costs will make it impossible for some owners to refinance when existing loans mature, forcing them to sell.
Property is also being pushed to the market thanks to the disruption in the gilt market caused by the “mini” Budget, which has forced many defined benefit pension schemes to rapidly sell assets to meet collateral demands.
Pension funds having to raise cash quickly have done so by selling off more liquid assets but are now considering jettisoning holdings in property funds, according to market participants.
Columbia Threadneedle, one of the UK’s biggest institutional property investors, suspended dealing in its £453mn UK property fund earlier in the week after a surge in redemption requests, following similar moves by three other UK funds a week earlier.
Even before the budget, pension funds were looking at reducing their property investments.
Shell’s pension fund recently put its UK property portfolio worth almost £600mn up for sale, though the company said this was “part of our long-term plan to reduce the investment risk in the [fund],” rather than a response to the budget.
Property owners with large portfolios are exasperated by the effects of the budget, which came as the market was already showing signs of turning after a long bull run underpinned by low rates.
“[The government] talks about ‘growth, growth, growth’, but borrowing costs are up massively. It’s madness . . . we will just have to battle through it,” said the boss of a FTSE 100 property group.
Additional reporting by Adrienne Klasa and Tom Wilson
