Fears about UK commercial property following last week's fund suspensions appear to be overblown with buying opportunities in several real estate investment trusts (Reits), according to UBS.
While still expecting the sell-off to knock around 20% off the value of London offices, 15% off UK retail and between 5% and 10% off London retail and industrial, the bank’s head of European real estate Osmaan Malik recommended picking up undervalued Reits.
'Property funds have nudged valuations down 5-10% and closed to redemptions,’ he wrote in a note to investors. 'The long-term demand picture in London is uncertain. While the direction is down, we see a number of factors that should mitigate the impact. The global search for yield continues to exert a bid for real estate, with implied yields of 5.5% backed by 7-10 year average lease length.
'Reits have positioned conservatively and with LTVs [loan to values] close to 20% will likely not breach covenants and could acquire distressed assets; while vacancy rates are low (sub 5%) [and] pipelines [of new developments] are likely to be shelved.’
Real estate values plunged 44% in the aftermath of the 2008 credit crunch. The potential for serious contagion has been mitigated by the substitution of equity for debt capital in the most recent boom, however, said Malik.
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