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UBS: fear the property selloff, but this is not 2008 redux

UBS: fear the property selloff, but this is not 2008 redux

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.

The house named Land Securities, Great Portland and Hammerson as its favoured picks in the sector, with Intu and Shaftesbury ones to avoid.

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