Valuations for top London property assets are being hit by rising interest rates and the volatile macroeconomic environment, according to two West End landlords that are in the middle of merging.
The portfolio valuation of Carnaby Street and Chinatown owner Shaftesbury PLC (LSE:SHB) fell 3.6% in the six months to the end of September 2022 on a like-for-like basis.
Capital & Counties Properties PLC (LSE:CAPC), which owns much of the Covent Garden estate, fell 2% over the past quarter alone, which it said reflected a 1.5% increase in estimated rental value and a 12-basis-point increase in equivalent yield to 3.94%.
“Valuers have reported an outward shift in commercial valuation yields, due to the impact on investment market sentiment of globally-rising finance rates and the deterioration in the macroeconomic outlook,” said Shaftesbury boss Brian Bickell.
Capco said the merger is still expected to complete by the first quarter of 2023, subject to clearance by the competition authorities.
Shaftesbury said its portfolio’s operational performance had partially offset the valuation decline, with a return to pre-Covid occupancy levels and growth in rental value to £15.8mln in the half year.
At the end of September, it said 4.0% of its portfolio was vacant, down from 4.7% at the end of March, while Capco’s vacancy rate increased to 3% from 2% at the end of June, with a further 5.5% held for development or refurbishment.
Capco chief executive Ian Hawksworth said macroeconomic conditions were having an impact on asset valuations but he was reassured by rental growth of the portfolio.
“Although the broader economic outlook is uncertain we are well positioned with a strong balance sheet and are confident in the long-term resilience of and prospects for the West End,” he said.
Other effects of rising interest rates and the volatility of the economy in recent weeks were also apparent on Tuesday, with Nationwide’s seasonally adjusted measure of house prices falling by 0.9% month-to-month in October.
Year-over-year growth dropped to 7.2% from 9.5% in September, well below the consensus forecast of 8.2%.
This was the first fall in Nationwide’s index for 15 months and the sharpest since the pandemic lockdown month of June 2020.
It “provides the strongest signal yet that house prices will buckle in the face of the surge in mortgage rates and the squeeze on real disposable incomes”, said economist Samuel Tombs at Pantheon Macroeconomics.
He said the current level of mortgage rates implies that the buyer of the average property with a 75% LTV ratio loan must commit to monthly repayments that absorb around 34% of their households’ disposable income, up sharply from 27% just three months ago and 21% a year ago.
“Few potential buyers will pass lenders’ stress tests, designed to see if they could make repayments if their mortgage rates rose by a further 2-to-3pp. Many others won’t be willing to commit to such a large jump in their housing costs; continuing to rent will be cheaper in most cases.” Tombs concluded.