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

Landsec owns, among other things, Piccadilly Lights  (Ocean Outdoor)
Landsec owns, among other things, Piccadilly Lights (Ocean Outdoor)

The value of Landsec’s City of Londonoffices fell almost 10% in the last six months in a sign that rising interest rates are beginning to hit commercial property values.

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

CEO Mark Allan said: “The material increase in bond yields since March has started to put upward pressure on property yields, principally for those assets where yields were lowest. In the sectors we are in, this principally affected London offices.”

Surging interest rates mean borrowing to buy property has become much more expensive, making it less attractive to investors.

“It is difficult to assess where interest rates will settle in the medium term, but it seems clear that in a long term context, the ultra-low rate environment of the past decade was the aberration - not the adjustment we have seen this year,” Mr Allan said.

Landsec’s properties in the West End were better at maintaining their value because supply is lower in those areas, he explained, losing 4% of their value during the period.

Some of Landsec’s other assets also dropped in value, including retail parks, which fell 5%, although shopping centre values rose 1.1% during the six months.

Oli Creasey, equity research analyst at Quilter Cheviot, said the figures hint at a wider shift in the property sector.

“We are now seeing property valuations starting to crack across the board,” he said.

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

Landsec has sold almost £2 billion of its assets over the last two years in a bid to concentrate on growth areas.

It plans to sell £2 billion more, Mr Allan said, although he added that the company was likely to hang back on reinvesting the money “for 12 months or so” until there were “better opportunities”.

In terms of leasing activity, Mr Allan said employers are keen to get workers back into offices, but a “two-speed market” had emerged where offices with amenities in well-located places were letting well, where others were struggling.