Into the red we tumble as economic turmoil starts to bite

EDITOR’S COMMENT The real impact of macroeconomic pressures started to be shown this week as the UK’s biggest listed REITs began to release their first-half figures. If you’re a glass-half-full kind of person, you will have looked at those figures and thought that the sector is actually proving to be pretty resilient. Top-line figures are strong. Revenue at both Landsec and British Land is up. Both admittedly have office portfolios skewed towards grade-A accommodation, but both remain largely upbeat about the leasing market. A big deal for British Land preletting a third of its space at its net-zero development Norton Folgate to Reed Smith was the good news story pinned to its results. And for Landsec, the half year had it complete £41m of lettings at prices 3% ahead of valuers’ assumption. Both too look solid when it comes to their finances. No need to refinance before 2025 and 2026, LTVs in the low 30%… However, if you’re a glass-half-empty type, then the big impact that factors outside of this industry’s control can have on the sector can be pretty scary. While those top-line figures give reasons to be cheerful, the bottom lines are anything but. Both REITs saw big falls into the red. British Land saw £370m of profit in the six months ended 30 September 2021 turn into a £34m loss during the same period this year. For Landsec, a £275m profit in 2021 slipped to a £192m loss this year. Both cited the impact of rising interest rates, inflation and good old macroeconomic pressures as reason for the decline – both offering up valuation declines as the main cause of their losses. However, look closer at their P&Ls and while revenue and profit are compared year-on-year, valuation falls are compared half-on-half. Comparing like-for-like, portfolio values have moved very little – just 0.6% for Landsec (against 2.9% half-on-half) and 2% for BL (compared with 7.9% half-on-half). Regardless of the size of the shift, valuations have fallen and will likely continue to fall. Both REITs have very clearly highlighted the macroeconomic outlook as their chief concern going forward, with inflation and rising interest rates having an impact on valuations, capital costs and investment and development strategies. The cost-of-living crisis will be hitting not just their own staff but the staff of their tenants and suppliers too. All costs get passed on. And ultimately – as we know from the great moratorium during Covid – the property-owning community often has to bear the brunt. Firms such as British Land and Landsec have the power and weight to have locked in a lot of their costs – particularly around construction – while for the vast majority of the property sector, for the SMEs that make up much of our market, the same may not be true and the rising cost of capital and goods will bite them much harder than it has these two. British Land and Landsec are just the first of a flurry of REITs to report (GPE was due to deliver its results as this lands in your inbox on Thursday morning) and we can fully expect them to set a trend. Declining profit, falling valuations, a silver lining of decent occupier demand for decent buildings, but an undertone of sitting tight and moderating activity. Last week I said I hoped to be proved wrong on my glass-half-empty view of this upcoming recession. This week’s figures offer evidence I probably won’t.   To send feedback, e-mail samantha.mcclary@eg.co.uk or tweet @samanthamcclary or @EGPropertyNews