Commercial Real Estate Sellers Expecting Pre-Virus Prices “Are Smoking Dope,” Says UK Fund Manager

Capital values across all segments (retail, office, industrial) already fell by 6.1% over the three months from March to May.

By Nick Corbishley, for WOLF STREET:

If you’re a commercial property fund manager in the UK and you think you’ll be able to fetch pre-lockdown prices for properties you need to sell, you’re “smoking dope”, according to Schroder Real Estate fund manager Duncan Owen. Owen believes that valuations of UK commercial property have at least another 10% to fall. His comments come as close to a dozen open-end mutual property funds, with roughly £12 billion in assets, remain suspended after gating en masse in March, leaving hundreds of thousands of retail investors unable to access their money.

These funds are “forced sellers.” They are not selling out of choice but rather out of the need to raise cash as quickly as possible in order to be able to reopen their doors and meet redemption requests. When there are lots of forced sellers in a market — especially big funds that were until recently big buyers that helped drive up prices — it means that prices are now headed down.

Owen, who is head of global real estate at Schroders and jointly manages the Schroder Real Estate Investment Trust, said that while “deal flow has considerably increased” over the past month, the prices being asked by sellers did not reflect the impact of the lockdown and its aftermath.

“Vendors are smoking dope,” he said. “They are asking for [pre-virus] prices and they are not going to sell at those prices.” Owen added that for firms on the lookout for new purchases, there is “no urgency” to buy as “the market will soften,” predicting commercial property had “another 10% to fall and retail maybe another 20%.” The fund has made no bones about the fact it is looking to reinvest after a sharp market correction.

Given the sheer scale of economic carnage the virus crisis has unleashed and the uncertainty that continues to grip financial markets, it’s still too soon to gauge how commercial real estates prices are responding. In fact, this is the official reason why the open-end funds were shuttered in the first place, and remain so: the “material uncertainty” caused by the crisis left valuers unable to accurately value 20% or more of the assets within the property funds. The unofficial reason is that many of the funds’ spooked investors staged a mad dash for the exits.

The retail segment of commercial real estate has been particularly hard hit, as many retailers, including big chains, have stopped paying their rents, cranking up the pressure on already struggling retail landlords. Many landlords have seen their income fall by as much as two-thirds since the crisis began.

Demand for office buildings is also at risk as companies come to terms with the fact that many of their workers can work from home. While new social distancing rules will increase the need for space for those workers who stay on in the office, it’s not clear whether it will make up the difference. In recent days, Lloyds Bank became the latest FTSE 100 company to warn that it would probably “need fewer buildings and different types of spaces” in future.

With rental income from retail properties plunging and demand for office buildings waning, at the exact same time that the market is witnessing a glut of those exact same properties as open-end property funds cash out, the values of those properties are coming under pressure.

In its latest Monthly Index, CBRE reports that capital values across all segments (retail, office and industrial) fell by 6.1% over the three months from March to May.

  • Retail sector capital values fell 1.7% in May from April, after a 3.6% in April from March. Shopping Centers reported the largest fall in value (-2.8%); shops in the South East recorded the smallest decrease (-1.4%). Average rental value in the sector fell by 1.6% compared to April — the largest month-on-month decrease in rental values for the sector in the history of the index. The worst performer was shopping centers whose rental values declined, in just one month, by 2.3%.
  • Office sector capital values fell by 0.6% in May from April, after having dropped 1.2% in April from March.
  • Retail warehouse capital values, despite the unprecedented surge in demand from e-commerce during the lockdown, fell 0.8% in May. Overall, rental yields rose 3bps in May, following a 17bps increase in April.
  • Industrial sector capital values fell 0.2% in May.

On Monday, one of the dozen or so gated open-end property funds, BMO Property Growth, announced it had reopened its doors. But there’s an important caveat: Only 28% of the fund’s portfolio was invested in direct property holdings in the UK. Perhaps. Other funds that are more invested in the property sector and that are now forced sellers will have a harder time in this market that has changed. By Nick Corbishley, for WOLF STREET.

“People do not buy a new outfit to stay at home.” Sales at stores that have reopened languish while ecommerce is booming. McKinsey: up to a third of global fashion retailers will not survive the crisis. Read… Europe’s Fashion Industry Faces Nightmare

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  35 comments for “Commercial Real Estate Sellers Expecting Pre-Virus Prices “Are Smoking Dope,” Says UK Fund Manager

  1. Seneca's cliff says:

    This stuff may be in such oversupply that it may have little or no value , like a closed down steel mill. At some point the cost to keep it up and keep squatters and protesters out exceeds it’s rental value. I think this will be true in the U.S. also.

    • Brad says:

      Buyers should buy now. In 2 to 3 years they will be showing up with trucks full of paper money and no property seller will take it.

      • Raymond Rogers says:

        You need to consider a few factors

        1. Will the people have money to buy your products.

        2. Will the county and state not tax the bejesus out of you to make up for lost revenue causing #1 to be more challenging.

        3. Will your location have a police force. Will they properly intervene.

      • nick kelly says:

        He’s talking about the UK. The UK pound is not a world reserve currency and it must import food to live. If the UK could just print it would have done that in the 70’s when it ran out of Forex and after being turned down for a loan by West Germany (30 years after Berlin was rubble) it had it to go to the IMF for an emergency loan.

        The IMF won’t let you just print either. Big cutbacks and had to sell part of BP oil. Austerity before Thatcher.

        Re: the gated RE funds. Who on earth will go into one of these again after being told he can’t access his money?

        The author’s estimate of a possible 10 % drop seems optimistic.

  2. fred flintstone says:

    As the virtual world expands……home prices will escalate……more time spent there means bigger/nicer is better…….commercial prices…….the sooner you sell the better.
    I had a buddy who owned the land under a large mall in the US. Way back in 76 after he had purchased the rights he bragged that by 2025, when the lease expired, he would be in a different status in life. I don’t think he understood then what status he was talking about. Penny, Nordstrom, Sears and Macy have all closed at the soon to his mall.

    • 2banana says:

      50 year time horizon investment for rights to land?

      Wonder what that investment would be worth today just invested in the S&P for all that time?

    • char says:

      Home prices are decided by three things. Location, location and location. But we don’t know how the world will look like in a year. Will it be back to 2019, 2019 but with much retail gone for good or will whole sectors of the economy be completely different and with it have different locations. And than there is the question of how the economy is doing. Are only the sectors doing badly that are directly hit by Covid (airlines/AirBnB/etc.) or is the economy doing so badly that all sectors are hit (like for instance grain farmers).

      There is another issue. People already spend a lot of their income on housing, In a healthy economy it would be a third but it is already higher so they can’t really spend that much more.

      I assume that your buddy has already sold its rights ages ago. Malls are normally partial financed by mortgages and those can be difficult with a short landlease period

  3. BuySome says:

    Now any good drug fiend will tell you “dope” is an offensive word and “addict” has to do with munchies. Mr. Owen must immediately resign his position so prices can “get higher”. No cream of mushrooms for Duncan-by order of The Soup Nazi!

  4. Joe says:

    Due to this lockdown, I still have 1/2 a tank of gas yet. 1 would normally be 4 tanks by now. Since early March.

  5. Paulo says:

    Commercial RE will still have that pesky elevator problem until the pandemic is over. And after that folks will have developed new work and shopping habits.

    Like Joe said, our gas bill is non-existent. It’s great. Currently waiting for an online delivery and now every supplier seems to be offering free shipping. This article just prompted me to check some fathers day sales. Might as well go for a twofer benefit.

  6. Tony says:

    I shorted the market on Friday. We’ll see what happens. It’s literally at last year’s price levels already right….which is total bs. This mother has to go down again.

    • Raymond Rogers says:

      Brave man. With the fed jawjacking and the politicians possibly talking more about another stimulus bill, you are taking a walk on the wild side.

  7. MonkeyBusiness says:

    Isn’t dope cheap nowadays? Cheaper than facing reality certainly.

  8. WES says:

    I suspect nobody wants to be the first mover.

    Nobody knows what the correct price is.

    The only safe option is to try and sell at the last known price.

    All the sellers ran for the exit at the same time when the music stopped.

    Nobody can leave because everybody is jam together at the exit!

    Buyers are in no hurry because there is no price discovery!

    Sellers are desperate but don’t want to sell too low in case the market recovers.

    Let the games begin! Music please!

    • 2banana says:

      Sellers are sellers for a reason. Usually one that is not a happy story for them.

      Sellers also have massive carrying costs.

      So the waiting game usually favors the buyers in a market freeze up/slow down.

    • Thomas Roberts says:

      Location Location Location. In many places you’d want to be the first mover, because, the trend would be downwards. It all depends on where people will move from and where they’ll move to. Also, if soon, many can no longer afford to buy or live in a house.

  9. Brant Lee says:

    Is there any bright spot for commercial real estate? Doesn’t look that way. Is virtual reality shrinking or expanding the world? Both I guess.

    • Thomas Roberts says:

      There are a few different commercial building types. The standard small store type building will probably hugely fall in demand, but, location always matters. Maybe, the small garage storage locker type building, might, do well. Restaurants will do poorly for awhile, but might come back strong, the building type for restaurants can sometimes overlap with stores though.

  10. leanfire_Queen says:

    I love witnessing the real estate sector crashing down. Hopefully, the residential sector in the US will do the same.

    Nothing makes me happier than watching the price of non-discretionary like housing becoming more affordable, whether it’s rents or home prices.

    To the fear-mongers: people should consider their first residency consumption instead of an asset. Problem solved!

    • Bookdoc says:

      If the residential RE prices tank it will be great for buyers, but I do wonder how many equity lines of credit and 95-100% financed homes will see an impact. Not sure how it will affect the reverse mortgages. I also think a drop in commercial RE has effects that radiate through a lot of areas.

      • leanfire_Queen says:

        Indeed. The sector is massively leveraged and we all want to see affordability for years now. But due to NIMBYsm, high prices were not able to generate higher supply.

        Why put up with high prices of a non-discretionary when they aren’t useful? If only forces a ton of households to waste too much $ on housing, just one of the ways the system has been failing allocating resources optimally.

    • Portia says:

      “people should consider their first residency consumption instead of an asset. Problem solved!”

      Whose problem? Nothing made ME happier than sending pesky RE agents packing when they pestered me for business for themselves, seeking lucre for my inconvenience of having to pack up and move.

      • leanfire_Queen says:

        > Whose problem?

        White elderly at the head of the Fed and Congress are terrified of a real estate crash. These guys are so out of touch!

        We’ll all benefit from housing being much more affordable imho.

  11. Fat Chewer. says:

    Allocating resources optimally means giving the 1% everything they want these days. After all, we are eternally indebted to the captains of industry and the movers and shakers of commerce for they have given us the bleakest future imaginable. All hail the great and the good.

    Enjoy your pathetic McMansion and such trinkets knowing that you are condemning us all to serfdom. Yes, you too. The time is coming (again) when we must all swear fealty to our overlords. Only then shall they protect us from the devastation they have wrought.

    • leanfire_Queen says:

      > Enjoy your pathetic McMansion and such trinkets knowing that you are condemning us all to serfdom.

      That’s only true if you consume like they want you to. Raise your savings rate to 70%, consume as cheaply as possible on housing, shift your healthcare burden to these NIMBYs.

      Problem solved: now they are your slave, they work for you.

  12. Anthony says:

    They have just announced payrolls in the UK down by 612,000…. As the unemployment rate goes up, so house prices tend to fall (with a time lag, of course) We will not know fully until October when the Govt furlough sceme ends… So I guess its tick tock time, as we all wait and see……

  13. char says:

    There are other issues with English real estate.

    It is not only hit by Covid but also by being the state in Europe that handled Covid worse. And than there is Brexit which hits different economic sectors than those hit by Covid. And there is also Scottish independence and Northern Ireland.

    • MiTurn says:

      And what about all the pensions and similar investments tied up in real estate? A long-term problem.

      • char says:

        Not with high inflation and high leverage. And a lot of death old people.

        • leanfire_Queen says:

          Can a series of pandemics that targets mostly the elderly and very sick fix these three structural problems?
          * high housing costs
          * high healthcare costs
          * unfunded pensions

        • char says:

          Covid kills to little for housing costs
          Covid does not save on healthcare costs. The death saves money but the ones that barely survive cost a lot more.
          And pensions have more to do with the economy

  14. Mr Wake Up says:

    Back in the states; The dope smoking also comes from the brokers who have to deal with sellers watching the printer go brrrrrr…..

    Hi expectations leads to getting high in order to cope with reality and insanity.

  15. Mr Wake Up says:

    Comment turned into poem:

    Office demand dead, industrial tenants down size but ecommerce increase instead.

    Store front demand dead, mom and pop or pop and pop cant even make ends meet since theres less feet walking down the street.

    The mayor cries for fed bailout lullabies while tenants scream in aganoy from the pain.

    Please stop it Mr landlord make it all go away. (The last 3 months past due rent) I hope to catch up another day.

    issue is when will such day?

    False Hope’s false dreams the American nightmare is what it seems. Doom and gloom on the horizon rent strikes still a hidden surprising.

    Now make way for the uprising. Mixed messages mixed signals no one understands root cause it’s the tune to the feds jingle.

    Still have the PTSD from 2008, took 3 years to find an escape.

    By 2014 I looked all around – we all forgot it seamed?

    Forgot the bailouts the kicked can down the road.

    Mario said we must destroy the futures of our grandchildren in order to save our selves!

    But didnt you already drink enough koolaid grandpa??

    French 18th century guillotine is more the solution seams…

    Challenge is media has done a terrific job behind the scenes. Distraction after distraction look over there. Yup another distraction leads u know NO where…

    Home schooled children became a blessing. Shelter the kids from the serpent exposing the deception.

    They are the future. And this is my present!

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