The sharp rise in borrowing costs since Kwasi Kwarteng’s “mini-budget” means that most of Britain’s warehouses, offices and shopping centres will lose as much as a fifth of their value over the coming two years.
The warning came from Goldman Sachs, whose team of analysts sounded the alarm over the outlook for UK commercial properties, values of which they expect will be 15 per cent or 20 per cent below where they were this summer, come the end of 2024.
The US investment bank’s gloomy outlook will add to fears that commercial properties in the UK are on the brink of another sharp fall.
As with homeowners, rising interest rates have made borrowing more expensive for commercial landlords too. The five-year swap rate, used to determine finance terms for commercial borrowers, has climbed above 5 per cent in recent weeks, having been at 0.55 per cent this time last year.
Having crunched through the numbers, Goldman estimates that commercial landlords’ borrowing costs could rise by 75 per cent over the next five years.
Higher interest rates and bond yields not only increase loan costs but also prompt would-be buyers to demand better returns on their investments.
Consequently, Goldman is forecasting that rental yields will have to rise by about 135 basis points over the next two years. That yield expansion does not look as if it will come from rental growth, the analysts said, meaning that it will have to be driven instead by a drop in headline prices.
Retail landlords have endured a rough decade or so as shoppers spend more and more online, while they went without millions of pounds of rent when their tenants were forced to shut for long periods during the pandemic.
They are again expected to feel the coming pain most acutely, Goldman predicts. With UK consumer confidence at record lows, retailers’ sales and margins are likely to come under pressure while they are also having to deal with rising energy and labour costs.
“This combination of revenue pressure and rising costs we think will act to put pressure on margins and weaken tenant credit quality,” the analysts said.
Goldman has bearish “sell” ratings on both Hammerson, which owns the Bullring mall in Birmingham and Bicester Village, and Land Securities, the owner of the Bluewater shopping centre in Kent.