MARKET REPORT: UK commercial property sector faces £14bn price drop due to soaring interest rates, Goldman Sachs warns
Goldman Sachs has sounded the alarm over UK commercial property – and warned the sector could see a crash fueled by soaring interest rates.
The investment bank has predicted that values across the sector could fall 15-20% between June this year and the end of 2024, wiping up to £14bn from the portfolios of some of the largest major players in the sector.
Goldman analysts said the sharp “price correction” would result from the rising cost of funding, as interest rate hikes by the Bank of England made it more expensive for developers to take out loans.
Sounding the alarm: Goldman Sachs predicts that values in the UK commercial property sector could fall by 15% to 20% between June this year and the end of 2024
The bank added that due to the darkening economic outlook, retail owners will come under “renewed pressure” over the next 12 months as consumer-focused businesses face a slowdown in demand caused by lowering the cost of living.
The Wall Street giant also pointed to a ‘growing vacancy risk’ as some businesses went bankrupt, and warned that rising energy costs for remaining tenants would not be ‘insensitive’ to landlords whose margins recipients are thin.
“The overall impact of rising energy costs may be small, but for low-margin businesses will not be negligible in our view,” Goldman analysts said.
Despite the bleak outlook, the investment bank said it was “not all catastrophic”, noting that shares of FTSE 100 Segro Group (up 1.5%, or 10.8p, to 711.8p ) and mid-cap company Derwent London (up 0.7%, or 13p, to 1920p) looked “oversold” after steep declines earlier this year.
The bank added that weakness in the sector could increase the potential for mergers and acquisitions as buyers seek to grab businesses on the cheap.
Despite Goldman’s warning, shares of major London commercial property companies rose after recent steep declines.
FTSE 100 company British Land gained 1.6%, or 5.3p, to 330.1p and rival Land Securities rose 3.1%, or 15.1p, to 504p.
Stock Watch – Zotefoams
Shares of Zotefoams soared as investors cheered a strong trade update.
The company, which makes materials for footwear, insulation and packaging, reported record sales for its third quarter and said profit margins were boosted by higher prices.
Risks to its energy costs had also diminished thanks to government support.
As a result, Zotefoams expected earnings for the full year to be “significantly above” market expectations. Shares jumped 24.5%, or 57p, to 290p.
But both companies are still suffering steep losses year-to-date, with British Land down nearly 40% since early January and LandSec down 35%.
The FTSE 100 rallied to end the day up 0.35%, or 24.12 points, at 6,850.27 and the FTSE 250 rose 1.91%, or 318.10 points, at 16,929 ,26.
The blue-chip index was heading for its seventh straight session in the red after stronger-than-expected US inflation data raised fears of steeper interest rate hikes from the Federal Reserve.
But it rallied towards the close following a rebound in US markets as well as reports that the government was considering cutting more parts of Chancellor Kwasi Kwarteng’s mini-budget.
UK-focused banking shares rose on hopes the turmoil in UK markets might ease, with NatWest up 7.7%, or 16.3p, to 228.7p, Lloyds climbing by 6.9%, or 2.68p, to 41.77p, Barclays rebounding 5.1%, or 6.86p, to 142.54p and HSBC up 2.3%, or 10.2p, to 459, 25p.
Oil prices lagged on fears that fuel demand could be hit by a global economic slowdown, a fear exacerbated by the prospect of ever-higher interest rates.
International benchmark Brent crude slipped below $92 a barrel but shares of Shell rallied after an early plunge to rise 1.5%, or 33.5p, to 2302.5p.
BP climbed 2%, or 8.9p, to 458.25p on the day its electric vehicle charging business signed a deal to support the fleet of London-based car rental company Addison Lee.
AB Foods, the owner of High Street retailer Primark, rose 2.9%, or 36.5p, to 1,286.5p after revealing its discount clothing store would launch a trial click-and-collect service in 25 of its stores before the end of the year.