Fears about the path of the UK commercial property market appear to be overblown with the recent expansion of discounts appearing to price the likelihood of a repeat of the 2008 downturn.
Implied yields which have climbed up to 90 basis points in the past few weeks to close to a record high over gilts at 5.7% and discounts of up to 40% suggested a 60-70% probability of a re-run of the credit crunch, said UBS.
While still expecting the sell-off to knock around 20% off the value of London offices, 15% off UK retail and between 5% and 10% off London retail and industrial, the bank’s head of European real estate Osmaan Malik has recommended picking up property at around 70p on the £1.
'Property funds have nudged valuations down 5-10% and closed to redemptions,’ he wrote.
'The long-term demand picture in London is uncertain. While the direction is down, we see a number of factors that should mitigate the impact. The global search for yield continues to exert a bid for real estate, with implied yields of 5.5% backed by 7-10 year average lease length.
'Reits have positioned conservatively and with LTVs close to 20% will likely not breach covenants and could acquire distressed assets; while vacancy rates are low (sub 5%) [and] pipelines are likely to be shelved.’
Real estate values plunged 44% in the aftermath of the credit crunch. The potential for serious contagion has been mitigated by the substitution of equity for debt capital in the most recent boom, however.