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UK-listed landlords are eyeing buying opportunities in the depths of the real estate downturn, as high debt costs force some owners to sell.
FTSE 100 warehouse landlord Segro on Wednesday raised £900mn in a share placing, which it said would be used to invest in building more warehouse space and make acquisitions. The company increased the raise from £800mn because of strong demand.
The placing comes as commercial property investors start to hunt for deals following a steep fall in real estate valuations brought on by rising interest rates.
Commercial landlords are predicting that higher debt costs will force a growing number of owners to sell if unable to refinance against lower property values when their loans come due.
Segro said “availability and cost of financing represents a challenge for many market participants” and that fortifying its balance sheet through the capital raise would give it a “competitive advantage”.
Derwent London, which leases offices to companies such as Pimco and BCG, also said on Wednesday it was looking at potential acquisitions, adding that office values were “now approaching this cycle’s lows”.
The FTSE 250 landlord, which is focused on London’s West End, reported its portfolio value dropped 10.6 per cent in 2023 to £4.9bn, following a 6.8 per cent decline in the previous year. But it said values could soon turn a corner as interest rates stabilise and then fall.
“We’re in a great place to acquire,” said Derwent chief executive Paul Williams. “I think we’re seeing the investment market stabilise. I think we’re near the end.”
The company anticipated more forced sales as “the number of refinancings is gathering pace” and some property funds faced pressure to dispose of assets in order to meet investor redemptions.
“With management effectively calling the bottom, perhaps now is the moment to invest,” Peel Hunt analyst James Carswell said.
Office vacancies have risen to two-decade highs in London and other major cities as some companies adopt working from home after the Covid-19 pandemic. But demand for space has been concentrated in the most luxurious buildings and convenient neighbourhoods.
Vacancy across Derwent’s office portfolio — three quarters of which is in the West End — fell to 4 per cent at the end of 2023 from 6.4 per cent a year earlier, and it upgraded its guidance for rent growth this year as companies compete for the most desirable offices.
Segro has also seen strong demand with like-for-like rental growth of 6.5 per cent last year. In results earlier this month, the company said it was “well-placed for further attractive growth as asset valuations start to bottom-out”.
The company last raised equity in June 2022, and said that it had since invested £2.2bn in development and £3.1bn in acquisitions, while selling £1.4bn of assets.
