It summarises how
both Lehman Brothers and intu met their fates. We called the top of the
shopping centre sector’s cycle five years ago and forecast a further 45% fall
in prime values due to the Amazon effect and death of the department store.
‘beds, meds & sheds’ REITs tag covering logistics, self-storage, student
housing, PRS and GP surgeries, we have now added ‘breads’ for supermarkets and
discounters. Their share prices are back to pre-Covid-19 levels, with Assura,
PHP, Supermarket Income REIT and SEGRO using their shares as currency to move
assets from the private to public market – which is what REITs are designed to
London offices continue to perform well and supply has been constricted, with
60% of the 12m sq ft due for completion by 2023 under offer or pre-let. Prime
rents are £110/sq ft in the West End and £75/sq ft in the City, with rent-free
periods around 24 months for a 10-year lease. Incentives will rise and rents
come under near-term pressure, but we do not think capital values will fall
significantly with support from bonds.
isn’t oversupply, so the risk to London offices is lack of demand, but we think
the market is heading for equilibrium and have upgraded our forecasts.
Reoccupation of offices is feasible with 1m social distancing, WeWork is
heading towards profitability and IWG is buying rivals, as it did after the
financial crisis. The 6% of London office space operated on this model seems
stable and here to stay.
High hopes: grade-A London offices have continued to
market is negative on London REITs; expecting a mass exodus to the ‘burbs, but
calling an end to centuries of urbanisation is probably premature. Covid-19
might slow the process but is unlikely to stop it and major Chinese cities such
as Shanghai and Beijing have adjusted to serial pandemics.
from home has its limitations, especially in collaborative industries. There is
the risk that every weekend is a long one; PwC is developing facial recognition
software to check employee ‘at the keyboard’ time. The death of distance
started in 2000 and with all the talk of relocating to rural idylls, it is
probably a good time to sell the Georgian rectory in Somerset.
buildings face issues of access. Returning workers will need to go up in socially
distanced elevators and exit down stairwells. Office seating areas, like public
transport, will be contactless and require masks to be worn. The losers will be
old buildings with small lifts, as their lift core cannot be expanded. Modern
air conditioning in grade-A offices provides a swifter change of fresh air and
higher filtration than 1980s or 1990s buildings, which will need expensive
is a ‘short, sharp shock’ with more similarities to 9/11 than the global
financial crisis. In April, we concluded that REITs were cheap at 50% discounts
to NAVs; they rebounded 25%,then gave up half these gains.
2008, REITs are now well prepared, having hoarded cash to bridge this income
interruption. Rent collection reports can, however, make it tricky to separate
tenants that have paid their rent and those that settled after ‘reprofiling’.
It is a
timely pretext for REITs to cut dividends and alleviate earnings pressure, which
had led them to invest in high-yield but high-deprecation assets. REITs are
cheaper than buildings ahead of an expected rerun of £30bn of asset stripping
in the early 2000s. REIT analysts are cutting earnings estimates more
aggressively than during the financial crisis, leaving room for a rebound on
upgraded our London office forecasts and what was capitalised at 3.75% will
probably trade at nearer 4%. Rents may soften 5% to 10%, with little growth and
increasing appetite for value-add assets.
optimism that a vaccine will be ready by the end of 2020. The government is
prioritising restarting the economy and has reopened lidos, hairdressers, nail
bars and tattoo parlours. The economic bounce is likely to look more like a
reversed square root zigzag and then a ‘corrugated’ recovery, at Ford Focus
rather than Turbo RS speed.
dividend yields of 3% to 4% aren’t exciting, but with bond yields near zero and
equity markets paying less than half last year’s dividend, relative to other
asset classes, REITs have their attractions.
is managing director at Jefferies