UK real estate stocks have seen more than £6.2bn wiped off their value since the start of the year amid a global stock market rout triggered by the falling oil price and China’s economic slowdown.
Stock markets around the world have been in free fall this month. Although mining and energy stocks have been hit the hardest, property companies have also taken a battering.
By mid-afternoon on Wednesday, with stocks falling sharply across the London Stock Exchange, UK real estate shares were down 9.7% on the start of the year. Relative to the FTSE All-Share, they have also fallen 2%.
Companies focused on the central London office market have suffered more than most. Derwent London shares have fallen more than 14% so far this year and Great Portland Estates is down about 12%. The upshot is that many companies are now trading at a significant discount to net asset value (NAV). British Land, which this week reported strong lettings figures for the third quarter, was trading at a discount of more than 22% to NAV.
Most equity analysts consider the extent of the sell-off unjustified. Highlighting how property shares fell before Christmas ahead of the US rate hike as investors prepared for higher rates and higher global economic growth, and how they are falling now as the outlook for growth weakens, JP Morgan analyst Tim Leckie said: “It’s either one or the other, you can’t have both. We view listed property as oversold, especially in the UK.”
Speaking last week at the EPRA Insight event, Morgan Stanley analyst Bart Gysens also downplayed fears that the market had peaked. “Property values don’t fall very often and each time it coincides with excessive lending,” he said. “We are far from that now.”
One of the few dissenting voices is Jefferies analyst Mike Prew, who has argued that plummeting oil prices are bad news for rents and foreign demand for UK real estate. Since he called the top of the market in August, UK real estate shares have fallen 16.6%.