British Property Has a Bad Week

CB Richard Ellis, the world’s largest advisory group on property. Has released a disturbing new report on the state of UK property values. UK commercial property values fell by 4.1 per cent in November in the most rapid correction ever seen in the sector. The total return from the sector – which includes rental income – was a 3.7 % fall for the month.

The report comes just before today’s figures from the Investment Property Databank, the most reliable source of information for the market are due.

Philip Ljubic of ABN Amro, said the figures tended to forecast the likely IPD assessment of the situation, “Generally this is a very good guide of what the IPD numbers will be.”

A negative return of over 3% would be the worst monthly return for either residential or commercial property in the past twenty years. The previous lowest monthly total return for commercial property since the IPD started keeping records was a negative 1.76% in 1989 and the largest drop in capital values in the housing market was a drop of 1.3 % in October 1992.

Many experts believe that there is not enough transactional evidence at the moment because the credit squeeze has put paid to many debt-funded deals and there is much debate about how much valuers should adjust property portfolios. DTZ, another firm of agents, has published a total monthly return of -1.6 % in sharp contrast to CBRE’s figures. Mr Ljubic said this was the first time there had been such a major discrepancy between agents’ figures.

Central London offices were the biggest fallers in November – because of fears about bank lay-offs – with capital values down by 6.4 per cent according to CBRE.

CBRE are also valuers to New Star, the fund manager, which this week shocked the market with an 8.2 per cent cut in values. New Star has slashed the value of its flagship property unit trust by 17.8 per cent as a result of collapsing confidence in UK property.

The surprise move is a blow to investors in the fund, which has seen its funds under management grow tenfold in the past three years. The New Star property unit trust, which invests in UK property, overtook many more established rivals to peak at £2.1bn, in part due to a high-profile advertising campaign. But the group on Monday told the London Stock Exchange it had cut its values as it blamed an “adverse shift in sentiment” towards commercial property. The fund’s valuation is now £1.74bn.

The group said the vehicle remained liquid and was not restricting unitholders who wished to sell, in contrast to other funds. However, it said that sentiment had deteriorated sharply in recent days.

The New Star fund has seen withdrawals of between 5 and 10 per cent since the summer.

Mark Dampier, of investment adviser Hargreaves Lansdown said, “Property had a great 10-year run, but it is going to take some time to recover from this,”

Until recently, property funds had seen a massive influx of money as investors jumped on the investment boom bandwagon. In the early summer, funds including the New Star unit trust changed their pricing from “offer” to “bid” in a sign that enthusiasm was waning. Since then, there has been a torrent of negative news.

Schroders has cut the value of its £2bn unit trust by 12.5 per cent, while other fund managers have told investors they must wait up to 12 months to exit. New Star said it is heavily invested in “prime” City offices, many tenants were blue-chip and it had 99 per cent occupancy. The vehicle would be valued at least twice every month until the market has stabilized.

CB Richard Ellis
New Star
Schroders