The tropical weather this week in northern Europe has helped to some extent to dispel the memories of a cool and rainy summer.
But a cold front will no doubt appear before long and, in the UK, cool winds have already been blowing through the listed property sector. Indeed, a split has become visible between quoted real estate companies with a focus on the UK on the one hand, and mainland Europe on the other, based on the latest reports over the summer.
While UK heavyweights like British Land and Land Securities stressed during their trading updates in July that their businesses were strong and resilient, and that they have entered this period of post-referendum uncertainty in a robust position, there was also a clear realisation that the temperature may drop further in the UK property sector.
‘It is too early to properly assess the impact of the referendum result on the markets in which we operate but we do expect some occupiers and investors to take a more cautious approach,’ British Land CEO Chris Grigg said.
At Land Securities’ annual general meeting in July, CEO Robert Noel said he expected business uncertainty to persist until there is more clarity on both the timing and terms of the UK’s exit from the EU. ‘This process may take some time. Demand from occupiers is likely to be subdued until confidence returns and this may have an impact on rental values.’
On a positive note, BNP Paribas Real Estate reported in mid-August that there is no sign yet of financial flight from London offices. Take-up of Central London offices reached 888,551 sq ft (82,500 m2) in July, the third highest monthly take-up figure for the year, according to the latest research from the Paris-based advisor.
One swallow doesn’t make a summer
But one swallow doesn’t make a summer, as those who remained in the northern hemisphere in July and August would certainly acknowledge. In any case, Toby Courtauld, CEO of Great Portland Estates, which has a heavy focus on London offices, saw little reason for optimism at his company’s latest trading update in early July.
‘Whilst tenant interest levels are currently healthy for our limited available space, it is likely that the uncertainty created by the EU referendum result will have a negative impact on economic growth in London. In the near-term, we expect confidence to reduce and some business investment decisions to be deferred whilst negotiations to establish our trading arrangements with the EU are undertaken. As a result, we can expect London’s commercial property markets to weaken during this period of uncertainty with the benefits of lower bond yields and weaker sterling offset by reduced rental growth prospects.’
In a recent report, ratings agency Moody’s predicted that UK commercial property values could fall 10% in a base-case scenario, depending on type, quality and location. In a hypothetical adverse scenario, with the UK economy in recession, the decline in prices would be more pronounced, although it would not, Moody’s said, be of the magnitude witnessed during the financial crisis, when prices fell by 45%.
While Moody's expects the UK commercial real estate sector to weaken over the next few months as investor sentiment has sharply changed following the vote to leave the EU, index provider MSCI claims it is already in ‘formal recession’. The verdict is based on a negative total return and capital value decline in UK property in July, as indicated in the IPD UK Monthly Property Index. The total return in July fell to -2.4%, compared to 0.2% in June. Capital values depreciated by 2.8% during the month, the second consecutive monthly decline after a 0.3% fall in June.
‘The July decline, coupled with the decline of 0.3% in June, indicates that the market is formally in recession post-Brexit referendum as weak investor sentiment hits yield pricing,’ said MSCI vice president Colm Lauder.
No mention of the 'B' word
Compared to their UK counterparts, the chief executives of listed companies located on the other side of the British Channel were more upbeat about their businesses and there was no mention of the 'B' word in the first-half earnings report of Paris-listed Unibail-Rodamco in July. Europe’s largest listed property company, which focuses predominantly on shopping centres in mainland Europe, reported that record low borrowing costs boosted first-half results after the price of debt fell to an unprecedented 1.7%.
The key concerns of CEO Christophe Cuvillier revolved around the terrorist attacks in Paris in 2015 and Brussels in 2016, but he was able to report that tenant sales in the group's shopping centres grew by 2.2% through June, after beating national sales indices in May with a rise of 2.1%. Germany, Central Europe and Spain were the principal drivers with growth of 4.2%, 3% and 2.7% respectively.
Meanwhile the company’s smaller French peer Klépierre raised its forecast after booking higher profits on the back of a net rental income increase. In contrast to Unibail-Rodamco, Klépierre focuses exclusively on dominant shopping centres in continental Europe. Shopping centres are at the core of what Unibail-Rodamco does, but it also develops and owns offices in Paris' La Defense business district and runs conference centres in the city.
On the retail front, UK REITs Hammerson and Intu are the best barometers of the cooler winds that have been blowing since the Brexit vote. That said, both retail companies may focus on the UK but they also have operations on the Continent. Indeed, in Hammerson’s case about 40% of the portfolio is located outside the UK.
Despite this mitigating factor, the London-based company was also relatively downbeat at its earnings presentation in July, saying that the impact of Britain’s decision to leave the EU on property valuations was still unknown, but that the lettings and investment markets were facing a period of uncertainty.
Rival Intu on the other hand gave its earnings presentation a more positive spin. The company, which now has a strong presence in Spain, has raised its guidance for full year like-for-like net rental income growth to 3-4%. In Spain the company signed 16 new leases at 16% above previous passing rent compared to an average increase of 7% overall.
It is a fact that the sun always shines more brightly in southern Europe, but from our vantage point in Amsterdam there now seem to be more swallows across mainland Europe.
Judi Seebus
Editor-in-chief PropertyEU