Don’t try to be King Canute, Stifel tells REITs
Analysts at investment bank Stifel say falling UK real estate values could bottom out sooner than expected – and have told REIT bosses not to try to hold back the tide as the market resets.
“We now expect the nadir to be sooner, and for the majority of asset value corrections to be reflected in portfolio valuations by the middle of this year,” said analysts led by John Cahill in a new note titled “The end is nigh… or more accurately, the trough is nigh”.
In previous cycles characterised by high leverage and ambitious development pipelines, Stifel said, “management teams have tried to hold back the tide of rising yields as best they can in an effort to buy time for developments to complete and possibly sell assets to reduce leverage, the latter itself precipitating a fall in capital values”.
Analysts at investment bank Stifel say falling UK real estate values could bottom out sooner than expected – and have told REIT bosses not to try to hold back the tide as the market resets.
“We now expect the nadir to be sooner, and for the majority of asset value corrections to be reflected in portfolio valuations by the middle of this year,” said analysts led by John Cahill in a new note titled “The end is nigh… or more accurately, the trough is nigh”.
In previous cycles characterised by high leverage and ambitious development pipelines, Stifel said, “management teams have tried to hold back the tide of rising yields as best they can in an effort to buy time for developments to complete and possibly sell assets to reduce leverage, the latter itself precipitating a fall in capital values”.
Now, the team added, UK REIT balance sheets are better placed to withstand a fall in values, while development programmes are mostly fully funded and often de-risked. “REIT management teams, investors and sell-side analysts need not channel their inner King Canute this time,” they said.
“The universal call is to ‘get this over with’. Valuers have responded to this mood and to the evidence in investment markets that have remained liquid, albeit not at the highs of 2020-2021, but still sufficiently across sub-sectors to provide the much required ‘price discovery’ mechanism.”
Stifel said recent data from the MSCI Index and CBRE shows that “after sharp falls in capital values late last year, January is already showing signs of stabilising”.
CBRE reported capital values down on average just 0.4% in January, with industrial and offices both down by 0.6% and retail dropping by 0.2%.
Capital values had fallen “more rapidly” since September than Stifel had expected, with the rate of decline becoming the fastest on record. Nonetheless, the team said, the depth of decline is unlikely to be as sharp as in the global financial crisis of 2008.
“Our broad premise that the logistics and central London office yields will rise 150bps from trough to peak has not changed, but some of this has been reflected in recent end-December valuations, and we now assume most of this will occur in the first half of this year,” the team said.
“We expect modest increases in retail yields, and for long income/indexed portfolio to reach a peak valuation yield of 5.25-6%.”
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