LondonMetric chief executive Andrew Jones this morning gave a bearish view of the real estate market, despite posting a positive set of results for the six months ended 30 September.
“While liquidity for real estate has improved from the days of the mini-Budget last year, the property market is still a long way from functioning normally,” he said. “We remain of the view that we won’t start to see normal liquidity for real estate until five-year swap rates fall materially towards 300bps.”
The five year swap rate is currently 415bps. Jones said he expected liquidity to improve as interest rates start to fall next year from a current peak of 5.25%.
“We are now operating in a new paradigm where, if the property market won’t offer price discovery, then the debt market inevitably will,” added Jones. “There is a significant amount of debt expiring and loans to be refinanced over the coming years. The overall property market remains over-leveraged or under-equitised and the banks are becoming increasingly active in forcing assets to the market.”
Jones said that level of refinancing in the market was creating “some very interesting debt propositions and distressed sales, especially outside of our core sectors”.
“Refinancings are exposing proper price transparency and highlighting to owners and debt providers that assets that once yielded a positive carry and attractive cash-on-cash metrics are now seeing equity holders being wiped out and lenders taking a loss,” he said. “This is particularly acute in the office sector where new working patterns combined with ageing stock and growing ESG requirements are having a dramatic impact on valuations. Assets that made sense when in a QE world of free money are no longer viable when borrowing costs are at 7+%.”
However, Jones said he felt more positive about the position of the UK listed sector, which has largely kept its LTV positions low.
“Many of the lessons learned from the global financial crisis were forgotten, but, in the UK, lower leverage was not one of them and so we are a long way away from a repeat of 2008/09,” he said.
Looking ahead, Jones said LondonMetric would continue to invest in its core sectors of urban logistics and long income.
“Our portfolio is in great shape with a strong and long income profile combined with attractive embedded reversion and continued rental growth prospects,” said Jones. “Our active management of leverage and negligible exposure to floating rate debt puts us in a strong financial position, which we will continue to exploit as debt refinancings force assets to the market and corporate consolidation opportunities present themselves.”
He added: “We remain alert to the structural changes that are impacting different real estate sectors and so are always conscious of which way the wind is blowing before we allocate capital and if an opportunity is structural or cyclical. As material shareholders in the business, the management team is fully aligned with shareholders and remains laser focused on ensuring that the portfolio remains fit for the future and can deliver long-term dividend growth.
“After all successful investments revolve around delivering attractive returns over the longest period of time. Hence our path to dividend aristocracy remains firmly on track.”
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