The post-pandemic trades driving commercial real estate
Making sense of the latest trends in property and economics from around the globe
4 minutes to read
Half-year results from Nationwide this morning offered a glimpse of the price paid by lenders to stay competitive.
The company grew its mortgage balance sheet to £210.8bn in the six months through September, up from £204.5bn in April. That amounts to a 0.3% increase in market share to 12.6%. Underlying profit before tax dropped to £959m, from £1.26bn, "primarily due to the profile of interest rates over the period and our choice to offer competitive rates," the company said.
UK lenders have slashed margins to defend their market share amid sluggish conditions that have lasted the best part of two years. Nationwide has been among the most successful by consistently offering rates that are among the cheapest on the high street and loosening criteria aimed at those near the foot of the property ladder. In September, the company extended its Helping Hand mortgage, enabling first-time buyers to borrow six times their income. It also increased the maximum loan-to-value for new-build purchases to 90%, from 85%.
Whether Nationwide and its peers attempt to rebuild those margins as borrowing costs fall will be among the key questions for the housing market moving forward. Colleagues at Knight Frank Finance think it's unlikely: "We expect them to prioritise retaining hard-won market share through 2025 at least," says the firm's managing partner Simon Gammon. Borrowers "can expect the lenders to cut rates quickly when the outlook for inflation improves."
Tilting portfolios
Company results season has demonstrated the polarised nature of the commercial real estate sector, whether that's the difference in the outlook by sector or between prime and non-prime assets.
Shaftesbury Capital, which invests in London's West End, published a half-year update yesterday that included £15.9 million of new leases and renewals on average 9% ahead of June's estimated rental values (ERVs). The company's vacancy rate is now just 2%, down from 2.7% in June.
Also yesterday, Londonmetric reported progress in tilting its portfolio towards the "structurally supported sectors of logistics, convenience, healthcare and entertainment." Logistics already accounts for about 45% of its £6.2bn portfolio and it is targeting 50% by the year end. Andrew Jones, the firm's CEO, told the Times that he wants to dispose of about £300m of buildings next year before ploughing most of the proceeds into acquiring more warehouses.
Similarly, British Land last week published an update on its big bet on retail parks. The company has sold £456m of "non-core" assets and spent £711m on retail parks since April. CEO Simon Carter says the parks offer "attractive occupational fundamentals and high occupancy" and now account for almost a third of British Land's portfolio, up from 15% in 2021.
Financial stability
These strategies capitalise on how consumer habits have shifted since the pandemic, whether that's click-and-collect shopping at retail parks or the coalescence of workers and shoppers in prime locations. These adjustments have further to run and will continue to drive investment globally - see also Blackstone's £0.5bn spend on southern European hotels, announced yesterday.
For those on the other side of these trades, however, the outlook remains stark. The European Central Bank published its latest Financial Stability Review last week. It was pretty sanguine about the residential sector - prices have bottomed out, and "better credit conditions and an increase in demand for mortgage loans are likely to exert upward pressure on house prices going forward."
But policymakers are still worried about the commercial sector: "the outlook for the lower-quality end of the market is particularly negative." A lack of transactional activity has artificially supported values and "any return to normal activity levels will likely cause prices to fall again". In a separate paper, researchers disclose that aggregate asset write-downs posted since the beginning of 2022 stand at just 3%, compared to a cumulative market price correction of 11%.
Even if interest rates continue to ease, firms will face higher financing costs than the years prior to the recent rate hiking cycle and, combined with lower profitability, some will struggle to service outstanding debt. That said, "banks’ aggregate exposures to CRE are substantially smaller than to [residential real estate] and are unlikely to be large enough at the euro area level to endanger the solvency of the banking system as a whole." Phew.
In other news...
Reeves vows no repeat of budget tax rises after employers' warning (Reuters).
Photo by David Pickup 🇬🇧