Value of Landsec’s City offices drops almost 10% as borrowing costs bite

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Return on ultra-low interest rates unlikely, says boss Mark Allen

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The value of Landsec’s City of London office has fallen nearly 10% over the past six months, in a sign that rising interest rates are starting to affect commercial property values.

The landlord reported that the total value of his property per share, a common measure used by property companies to measure performance, fell 5% in the six months to September, to £10.10.

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CEO Mark Allen said: “The material increase in bond yields since March has begun to put upward pressure on property yields, primarily for assets where yields were lowest. London offices have been affected by this.”

Rising interest rates mean that it has become much more expensive to borrow to buy a property, making it less attractive to investors.

“It is difficult to assess where interest rates will set in the medium term, but it seems clear that in the long-term context, the ultra-low rate environmental divergence of the last decade – not the kind of adjustment we have seen this year,” Mr. Allen said.

Landsec properties in the West End were better able to retain their value because those areas are in short supply, he explained, losing 4% of their value during this period.

Some of Landsec’s other properties also declined in value, including retail parks, which fell 5%, although shopping center values ​​rose 1.1% during the six months.

Ollie Creasy, Equity Research Analyst at Quilter Cheviot, said the figures indicate a broader turnaround in the property sector.

“Now we are seeing that valuations of assets have started happening across the board,” he said.

“All eyes will now be on other REITs to follow suit, not all of which are starting from such strong positions.”

Landsec has sold nearly £2 billion of its assets over the past two years to focus on growth areas.

It plans to sell £2 billion more, Mr Allen said, although he said the company could hold off on reinvesting the money for “12 months or more” until there is a “better opportunity”.

In terms of leasing activity, Mr Allen said employers are willing to bring workers back to offices, but a “two-speed market” has emerged, where offices with facilities in well-located locations were running well, where others were struggling.

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