Uk Commercial Property R... Share Discussion Threads

[spectoacc] 11/10/2022 09:21

@nickrl - feel like I'm missing something with the BoE's support operations. There doesn't seem to be dysfunction, only a resetting of Gilt yields (much as REITs have "reset" about 40% lower than they were). BoE throwing their weight around by upping size to £10bn/day, by saying they'll take other collateral with a haircut inc corporate bonds, and now by going into the Linkers market.

But why? There's surely no large LDI pressure/issues now. They're spending very little, because very little is being tendered, because there isn't any contagion/dysfunction.

Am I missing something? What are the BoE actually up to?

[spectoacc] 11/10/2022 07:03

@PPCEH - all valid points. The cure for high prices is high prices, but we surely need to get through the winter first - Private Eye have been saying for months that we'll have gas rationing this winter, and only last week did NG float the idea. A mild winter might save us, but nothing else - the interconnector we rely on will serve the continent first.

At some point, gas prices moderate and fall out of the inflation figs. The price cap extends that tho.

Unemployment is the huge missing piece of the puzzle. Everything screams early 90's - inflation, rising interest rates, heavy recession, house price crash, 7 years to regain highs. With the sole exception of unemployment.

My mind's open, but we'd be at mid teens inflation without the fuel price cap. Wages are going up because there's such a shortage of workers. Consumer spending is going off a cliff. A lot of companies are short-staffed and can't meet orders. Wages have to keep rising.

But for the REITs, it's all about interest rates it seems, and how serious the BoE is.

[nickrl] 10/10/2022 18:27

@gco113 agree but doesn't appear to be a liquidity issue given the low level of uptake so far.

[essentialinvestor] 10/10/2022 17:51

Indeed, however higher longer term rates are an element in asset valuations,
particularly for this sector.

[gco1133a] 10/10/2022 17:42

The point of the B of E programme is not to reduce rates per se but just to prevent a sudden spike in yields which could cause another LDI liquidity related issue.

[nickrl] 10/10/2022 17:37

So BoE dangles the carrot first thing about being in the market for 10B/day this week but only 853m is tendered and BoE buys the lot this time and at much higher yields than it was prepared to do last week. Still only spent 5.4B to date. Interesting dynamic going on here.

[essentialinvestor] 10/10/2022 17:05

Fitch comments today not helping and a significant downgrade to their '23 UK GDP
outlook.

[spectoacc] 10/10/2022 17:00

Thanks both. Yes, it's a fair point @HP, have been having a debate with someone elsewhere about that. Their argument - "The differential won't be maintained just because rates go up, it wasn't pre-ZIRP, REITs often yielded about what they yield now".

My argument - the REITs may well have yielded roughly the same pre-ZIRP, but the properties didn't, and that dictates the valuations. ie the earnings yield/divi is a function of the gap btwn borrowing costs and property yield, inc equity/loan ratio. Industrial's standard yield pre-ZIRP was around 10%, and certainly not 3%.

Not sure if I've explained that very well. Bottom line - yields have to go up, and whether a REIT has fixed its debt way into the future isn't particularly relevant to the valuation of its assets, because those assets are valued on what they yield, which itself is a function of borrowing costs (& therefore interest rates).

.

[essentialinvestor] 10/10/2022 16:55

spec, yield on the UK 30 year back above 4.6%, below 3.9% initially on BOE intervention.

[hugepants] 10/10/2022 16:09

The yield value relationship is not a straight line though spec. I think the market is behaving as though it is mind you.
Agree PPCEH. It feels like this is the time to buy not sell.

[spectoacc] 10/10/2022 16:07

That's all true. However, I also can't see much panic/capitulation yet!

Market will definitely look ahead, and any Fed pivot may save us. Powell seems to want to be the new Volcker tho, & until we've seen unemployment (US & here), will any of this end? The inflation is broad based.

Ukraine/Russia - can't see it ending until next year at earliest, and when it does, do we start buying Russian gas again? Suspect higher prices are here for the foreseeable, albeit they do fall out of comparison after a year.

Agree on $ investors - I think that insulates London at least, and probably helps elsewhere.

A lot depends on whether you think this is the end of 14 years of ZIRP, or whether you think the can can be kicked further. I had 3% as the top for UK rates, until Truss/Kwarteng came along.

Also whether you think inflation is becoming ingrained, or is temporary (I'm not saying "transitory" because honestly, who thought that?).

[ppceh] 10/10/2022 16:01

Yes valuations are driven by the forward curve but as we enter 2023 and recession, this should fall away. Property valuations will anticipate.

There should be plenty of US and ME investors sitting on overvalued $’s and looking for a home.

Plus the natural contrarian in me thinks that Ukraine/Putin/gas prices/inflation won’t be that bad. Market bottoms are when the last bull turns bear and right now I can’t see many bulls!

[spectoacc] 10/10/2022 15:21

@HP - agree on supply/demand, there's still a shortage, there's still very little being built, we're still not pushed into a proper recession yet.

But disagree re valuations, because those are ultimately based on yield. To take big box: when interest rates were 0.25%, borrowing costs 1.5%, 3% yields were fine.

Interest rates now 2.25%, going to 3% in weeks, likely 5% or more 2023. Maintain the differential, and your 3% yields are wildly out. All things being equal (there'll be some rental growth; the market will look ahead etc) that 3% becomes eg 6% (& the 6% on some other sectors, 9%). Your "V" has potentially halved, with nasty knock-ons to LTV.

That's the reality unfortunately, & why I fear the market isn't yet overreacting with these prices. I'm stuck in plenty, but can't bring myself to buy even at 50% discounts to NAV.

[hugepants] 10/10/2022 15:11

But valuations were based on supply and demand and the price of the transactions. Has supply and demand suddenly changed massively? I doubt it. I expect NAV to drop but will it go down to 90p which is where it was before covid. Even if it does UKCM will still be on a 40% discount and a relatively low ie. sub 20%, LTV. 6%+ yield currently.
BTW the UKCM nav never really took off in the same way as say the BOXs or even the likes of CTPT.

[essentialinvestor] 10/10/2022 14:42

SKY, I referred to that sector as bubblicious on the SHA board last December
this before the huge gilt yield move. Movements in longer term rates since leaves
values looking ludicrous and we know what comes next.

[hugepants] 10/10/2022 14:32

I wonder when UKCM last talked to Pheonix. They may want to double check their voting intentions.

[spectoacc] 05/10/2022 15:25

Continuation vote a waste of time & money, but be good to see those UKCM directors/managers who are "..Vote their entire beneficial holdings in favour [of continuation].." perhaps buy a few in the market down here.

[skyship] 05/10/2022 15:25

Specto - can only imagine that the reason for an apparent underperformance is their 64% allocation to Industrial - that sector also over-cooked; especially in the SE.

[nickrl] 05/10/2022 14:43

UKCM issued continuation circular which you can find in the end on there awfully laid out website although don't bother looking at it basically just regurgitates 30/6 info. You would have thought they would have used some 30/9 data which there sister fund API has managed to do today but then with Phoenix supporting it they don't need to try too hard as its a done deal.

[spectoacc] 05/10/2022 10:43

Weird one isn't it. High LTV, low LTV, UK, Europe - all treated the same.

Can understand "risk off" and where the market probably rightly sees asset values & interest rates heading. Can understand the lowest yielding areas (Big Box, mainly) getting tonked - yields double, values halve, all things being equal.

Can understand for any with a refinancing, or short-dated debt, or exposed to a declining sector like Offices.

But it's across the board - does that mean there's babies going out with the bathwater?

Probably, but good luck buying. I have EBOX, BCPT, UKCM in size, and not helping me one little bit.

I still don't like UKCM's management, nor their speculative Leeds hotel development, nor them being super-low geared during the Covid recovery before building gearing back just as the peak came. But still! Not expensive, far better placed than some.

You wonder how the likes of RGL are no worse, or NRR or HCFT outperforming. UKCM sold just because it's liquid? .

Still think "Too late to sell, too soon to buy". But that may be influenced in either direction by holding already.

[hugepants] 05/10/2022 10:28

Down 6%! Barely above its recent lows. The low 13% LTV is not protecting the share price as you'd expect.

[nickrl] 02/10/2022 13:05

Quarterly Divis were only 96% covered in H1 at cash level so paying out that special (25m) is coming off the asset sales or going on borrowings in H2. Balance sheet can easily absorb it and at least they prepared to do it unlike others. Not much asset mgt info but maybe they will be more enlightening when they release full half year report like there sister reit API.

[hindsight] 30/9/2022 10:10

For them fairly negative

Investment Outlook
Looking forward we expect some of the strong first half 2022 performance to be
unwound over the second half and, given the current market environment, our
overall outlook for the next 12-18 months has been revised downwards

[spectoacc] 30/9/2022 07:37

UKCM seem to be seeing a different market to the rest of us.