Nov 14 (Reuters) – Real estate investment trust Boston Properties (BXP.N) on Tuesday agreed to sell a 45% interest in two Massachusetts-based life sciences development properties to Norges Bank Investment Management at a gross valuation of about $1.66 billion.
Shares of the REIT rose 9.4% in early trading and were on track for their best day in more than five months at current levels.
Massachusetts, especially Cambridge and Boston, is known to be a hotspot for biotech companies including Moderna (MRNA.O). The state is also regarded as the top biopharma cluster in the United States.
Norges Bank Investment Management is investing $746.4 million to form the joint ventures to own both properties totaling nearly 810,000 square feet.
Boston Properties, which is the largest publicly traded developer, and manager of premier workplaces, will retain a 55% interest in 290 and 300 Binney Street, and provide development, management and leasing services.
290 Binney Street is under construction and pre-leased to AstraZeneca (AZN.L), while 300 Binney Street is under redevelopment and pre-leased to the Broad Institute, a non-profit organization.
Reporting by Mehr Bedi in Bengaluru; Editing by Arun Koyyur
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JOHANNESBURG, Nov 6 (Reuters) – The property cycle has bottomed out and 2024 will be the turning point when interest rates begin to ease, South African commercial property group Redefine (RDFJ.J) said on Monday as it posted a drop in full-year distributable income.
The commercial real estate sector was one of the hardest hit by the pandemic, when government-imposed lockdowns shut offices and limited shopping trips, resulting in some tenants deferring rent, hitting income and profits for the sector.
While share prices have recovered, property companies globally are facing a double whammy of sliding office occupancy and sharply higher funding costs driven by higher interest rates.
In South Africa, the central bank paused its interest rate hiking cycle in July for the first time since November 2021. Economists expect rate cuts to restart as early as the first half of 2024.
“When interest rates start to come down, it will mark a turning point for the investment real estate cycle,” Group CEO Andrew Konig told journalists.
Elevated interest rates increased Redefine’s net funding costs and were also the main driver of distributable income falling by 4.1% to 3.5 billion rand ($192 million) in the year ended Aug. 31.
While the cost of debt ticked up by 110 basis points to 7.1% from 6% in 2022 due to higher rates, the company is largely protected against rising rates and is well-hedged at 77.1% of total group debt, Chief Financial Officer Ntobeko Nyawo said.
Vacancies in its office portfolio fell to just below 12% from 14.4% as the group continued to benefit from demand for premium grade and well-located property. About 95% of its offices are A and premium grade buildings.
Bigger rival Growthpoint Properties (GRTJ.J) also saw office vacancies fall, with more demand for its premium grade offices located in Cape Town and Umhlanga Ridge in KwaZulu-Natal driving occupancies.
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Reporting by Nqobile Dludla; Editing by Kim Coghill, Christopher Cushing and Jan Harvey
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LONDON, Nov 3 (Reuters) – The troubles faced by co-working titan WeWork (WE.N) are darkening the outlook for the world’s largest business hubs, where rising office vacancies are already heaping pressure on investors set to refinance big-ticket mortgages next year.
Media reports on Wednesday suggested the New-York listed flexible workspace provider – once privately valued at $47 billion – was weighing a petition for bankruptcy next week.
Backed by Japan’s SoftBank, WeWork aimed to revolutionise the office market by taking long leases on large properties and renting the space to multiple smaller businesses on more flexible, shorter arrangements.
But like other landlords, it has struggled to persuade some customers since the pandemic to swap working from home for the office at its 650-plus locations worldwide – a trend that has shaken confidence in the sector.
Global office vacancies are expected to climb, hurting rental prospects in cities like New York and London, eight industry executives, investors, lenders and analysts said.
Some leveraged property investors could struggle to earn enough rental income to service rising debt costs, they said.
“The loss of any tenant, especially during a time of relatively slow office leasing, will have a negative impact on office building cashflows and values,” said Moody’s Analytics’ Commercial Real Estate Industry Practice Lead, Jeffrey Havsy.
“This will add to the negative sentiment in the marketplace and make financing harder, especially those buildings that need to refinance in the next 12-18 months,” he said.
A WeWork spokesperson told Reuters the firm was in talks with landlords to address “high-cost and inflexible lease terms” and was striving to remain in the majority of its locations and markets.
The number and volume of real estate loans due for refinancing in 2024 is unclear because many deals are struck privately between borrower and lender, Ed Daubeney, co-head, debt and structured finance, EMEA, at real estate services firm Jones Lang LaSalle, told Reuters.
Analysts estimate the global commercial property lending market is around $2 trillion in size, roughly split 50:50 between banks and alternative lenders in the United States and 85:15 in Europe.
Several experts contacted by Reuters predicted a year of reckoning for property investors and lenders in 2024, with time running out for those turning a blind eye to assets that would be in breach of key lending terms if revalued today.
The value of all global real estate – residential, commercial, and agricultural land – was $379.7 trillion in 2022, Savills said in a report in September, down 2.8% on 2021.
TRANSACTION SLUMP
Real-estate loan refinancings have already been complicated by a plunge in transactions, which are crucial in tracking changes in asset values.
MSCI’s Capital Trends report for Europe showed third quarter volumes down 57% on 2022 levels – the lowest since 2010.
What’s more, the gap between what investors believe assets are worth and what prospective buyers are willing to pay is between 20% and 35% in core office markets – “far worse than the height of the global financial crisis”, MSCI said.
MSCI said prices in Europe’s two largest office markets, Britain and Germany, would have to fall another 13%-15% to bring market liquidity back to its long-run average.
Global lenders to UK real estate holding and development companies, which supplied credit risk assessments to data provider Credit Benchmark in October, said those firms were now 9% more likely to default than they estimated 12 months ago.
U.S. industrial and office real estate investment trusts (REITs) were seen 35.8% more likely to default, versus expectations a year ago.
RE-LETTING
WeWork has 3.25 million square feet of space in central London, with a total annual rent roll of 192 million pounds ($234 million), Jefferies said in a September note. Its biggest U.S. markets are New York and California, where it operates 49 and 42 sites respectively, according to WeWork’s website.
Industry sources said some of its most popular locations could be taken over by rivals at similar rental rates, minimising cashflow issues for landlords.
But flexible workspace demand in Britain is still 11% below pre-pandemic levels, the Instant Group’s 2023 State of the UK Flex Market report in September showed.
Lenders might view the WeWork debacle as a cautionary tale, sources said, potentially requiring borrowers to inject more equity into their properties to reduce the loan-to-value ratio.
But such a request could be problematic if the quantum and duration of rental income remain uncertain.
London office vacancies have surged to a 30-year high, Jefferies also said in September, with average lease lengths on central London offices sliding to six years from 11.6 years a decade ago, according to BNP Paribas Real Estate.
UK property company Helical said it was working on “next steps” for the space at one London property let to WeWork, after recouping rent it had failed to pay via a short-term licence arrangement.
Under-occupied urban offices are not only generating lower than expected rental income for owners but some are also ageing rapidly in a world increasingly sensitive to carbon consumption.
“We’re at a massive turning point in the real estate investment market globally,” Jose Pellicer, head of real estate strategy at M&G Real Estate, said.
“For the last 20 years, property yields have been higher than financing costs. But a far bigger percentage of a property return is going to have to come from growth in the 2020s.”
($1 = 0.9407 euros)
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Reporting by Sinead Cruise
Editing by Elisa Martinuzzi and Mark Potter
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A Wall Street sign is pictured outside the New York Stock Exchange in New York, October 28, 2013. REUTERS/Carlo Allegri/File Photo Acquire Licensing Rights
Sept 22 (Reuters) – Shares in real estate companies fell on Friday, adding to a massive sell-off the previous day, when bond yields jumped to their highest levels in 16 years after the Federal Reserve signaled that U.S. interest rates would stay high for longer.
The S&P 500 real estate index (.SPLRCR) lost 0.7% on Friday after falling 3.5% on Thursday, which was its biggest daily decline since March when the banking sector was in crisis.
The U.S. Treasury 10-year yield , fell slightly on Friday, after rising on Thursday to around 4.5%, its highest since 2007. This provided tempting returns for fixed-income assets, making the relatively high dividend payouts of Real Estate Investment Trusts (REITs) a little less tempting.
REITs also tend to borrow heavily so the prospect of higher rates for longer puts pressure on their profit outlook. While the Fed decided not to hike interest rates after its meeting on Wednesday, it indicated that rates could stay at elevated levels for longer than investors had expected.
“Not only are REIT’s bond substitutes but they also rely on borrowing so that just makes them doubly interest-rate-sensitive,” said Jack Ablin, chief investment officer of Cresset Capital who says that even though the sector seems cheap by some measures, he is not ready to step in right now.
The S&P 500 real estate index is the second weakest performer among the benchmark S&P 500’s 11 major sectors with a decline 6.5% so far this year, second only to utilities’ (.SPLRCU) 10.3% drop. This compares with year-to-date a gain of about 15% for the benchmark index.
But Gina Szymanksi, portfolio manager for REITs at AEW Capital Management, said she expects Treasury yields will peak around current levels, which will help REIT stocks that have “already baked in” 10-year Treasury yields in this range.
“The knee-jerk reaction is, as interest rates rise, you sell REITs. It’s not totally unrealistic. They are capital intensive businesses that require financing,” said Szymanski, adding that if 10-year yields rise sharply from here it would add pressure to REIT stocks.
But if the economy weakens, REITs often outperform.
“When the Fed tries to slow the economy, it’s usually successful. That usually results in declining earnings for companies in general and when that happens it’s the time for REITs to shine,” says Szymanksi who estimates a roughly 20% total return for real estate stocks in the next two years.
On Friday the biggest real estate loser was American Tower (AMT.N), which finished down 1.8% while the biggest gainer was Extra Space Storage (EXR.N), up 1.2%.
Alexandria Real Estate Equities (ARE.N) fell 1.6% on Friday, after losing 8% on Thursday and hitting its lowest level since 2016.
Reporting By Sinéad Carew, editing by Lance Tupper and David Gregorio
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MILAN, Aug 24 (Reuters) – It’s hard to be bullish about real estate in an environment of sharply higher interest rates. Yet unloved property stocks in Europe staged a surprise rally this summer, suggesting contrarian investors are starting to look past the worst.
Two years of steep falls have made European property a short-seller favourite as sector valuations and investor positioning plunged to levels last seen during the 2008 global financial crisis.
A gauge of European real estate shares (.SX86P) has halved in value to about $131 billion since 2021, but the mood shifted in July as earnings expectations improved.
The index outperformed the broader market (.STOXX) in July by as much as 10 percentage points before a volatile August, squeezing short sellers just as inflows into some sector-focused exchange traded funds picked up.
Gerry Fowler, Head of European Equity Strategy at UBS, said bond yields in Europe seemed to have stabilised on bets the European Central Bank would hike interest rates just one more time in September, and that was starting to ease pressure on real estate companies while encouraging more investor interest.
“Things aren’t great for real estate companies and that’s why they are trading at a huge discount. Do we expect them to immediately go back to full valuation? Probably not. But from a direction of travel perspective things have started turning the corner,” he said. “In the last month or two we’re starting to get hints of companies’ ability to re-focus on profit growth”.
Refinitiv data shows earnings revisions turned positive in July after 15 months of downgrades. Profits are now seen rising 1.4% in 2024, versus previous expectations of a slight drop.
However, Zsolt Kohalmi, co-CEO at Pictet Alternative Advisors in London, said interest rates in Europe would need to fall by some 150 basis points to kick-start the market which was struggling due to a “complete standoff” in transactions because buyers and sellers are unable to agree on price.
“Some people this summer are making the bet that it’s going to be all rosy. Inflation is going to come down, interest rates are going to come down and some of these structural problems of real estate will be solved,” he said.
“It is a scenario. But I don’t know how likely it is… I think it’s going to take longer and we may have another low before we have ups,” he said.
Shares on loan, a proxy for short interest, across Europe’s listed real estate management and development firms has fallen by almost a third since a peak in May to below 1.7% of their market capitalisation, according to S&P Global Market Intelligence.
Meanwhile, BlackRock’s iShares European Property ETF (IPRP.L) has seen a 10% surge in inflows from late February, according to data on its website.
Most investors are still steering clear. Bank of America’s fund manager survey (FMS) in August showed investors had capitulated with positioning falling all the way down to 2008 levels, but buying REITs (real estate investment trusts) was its top contrarian trade.
Real estate in Europe is 30% cheaper than its 20-year average price-to-book valuation and displays a 49% discount to the market, its biggest in fifteen years, Refinitiv data shows.
A report in July by the corporate and investment banking unit at Natixis suggested European commercial property transactions dropped 60% year-on-year in the first quarter.
Natixis is modelling for declines in property values and sees risks of rating downgrades for six out of 22 REITs, which could add to challenges of securing debt financing, it said.
Banks are increasingly vigilant about a deterioration in the quality of their loans to real estate firms, with key ratios including loan-to-value under sustained pressure, raising the prospects of covenant breaches which could force borrowers to top up equity or even sell assets.
Societe Generale, which has had zero real estate exposure for over a year, views the summer bounce as a false start and believes there is no clear direction in the sector’s earnings.
“We don’t like picking up pennies in a low-liquidity market. Opportunities may emerge… but this doesn’t paint a great picture for the sector,” said Charles de Boissezon, Head of Equity Strategy at the French bank.
Risks for real estate include another wave of inflation. Pictet’s Kohalmi also said the “biggest unknown” was contagion from the next round of refinancing, especially in the highly oversupplied market of office buildings in the U.S.: “Because senior banks don’t want to refinance, nobody knows how it will play out”.
For UBS’s Fowler, however, European real estate stocks have room to keep outperforming into year-end: “The best ideas are when you can’t fully justify a bullish case… By the time you know for sure that things are better it’s probably already too late”.
Reporting by Danilo Masoni, editing by Sinead Cruise and Elaine Hardcastle
Our Standards: The Thomson Reuters Trust Principles.
The Sydney city centre skyline is seen as the state of New South Wales continues to report low numbers for new daily cases of the coronavirus disease (COVID-19) in Sydney, Australia, August 16, 2020. REUTERS/Loren Elliott/File Photo Acquire Licensing Rights
SYDNEY, Aug 18 (Reuters) – Australian real estate firm Dexus (DXS.AX) said on Friday it had sold an office building in downtown Sydney, with the buyer receiving a 16% discount on a 2022 valuation as higher interest rates and home working crunch prices for office space.
Reuters reported on Wednesday that the company, one of Australia’s largest landlords, had signed a conditional deal last month to sell its Margaret Street building in Sydney’s central business district, citing its annual report.
The property industry globally, and office building owners in particular, are struggling as working from home and e-commerce lead tenants to reconsider floor space just as higher interest rates reduce building values and raise debt servicing costs.
Dexus sold the 18-story A-Grade office for A$293.1 million ($188 million), a 16.3% discount to its December 2022 valuation, according to company filings.
Quintessential Equity, an Australian property developer and investor, announced itself as the buyer on its website without elaborating. Dexus will own a A$50 million stake in the trust that will hold the property, it said in a statement.
In June, Dexus sold another premium office building in Sydney’s central business district for A$393.1 million, a near 17% discount to an independent valuation made in December.
Dexus CEO Darren Steinberg said on Wednesday forced sales were off the cards because it had raised enough financing from banks and a recent note issue to fund its pipeline and would only sell assets to recycle cash into higher-yielding projects.
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Reporting by Lewis Jackson in Sydney and Rishav Chatterjee in Bengaluru; Editing by Subhranshu Sahu, Rashmi Aich and Sam Holmes
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Sydney office buildings and commercial real estate appear behind Sydney waterfront properties in the suburb of Birchgrove, Australia, November 3, 2016. Picture taken November 3, 2016. REUTERS/Jason Reed/File Photo Acquire Licensing Rights
SYDNEY, Aug 16 (Reuters) – Australia’s Dexus (DXS.AX) swung to its first net loss since 2009 as higher interest rates wiped nearly A$1.2 billion ($773 million) off the value of its property portfolio, but said it would not be a forced seller of real estate.
The property industry globally, and office building owners in particular, are struggling as home working and e-commerce lead tenants to reconsider floor space just as higher interest rates reduce building values and raise debt servicing costs.
Rising rates wiped A$1.18 billion off Dexus’ A$17.4 billion property portfolio and drove one of Australia’s largest office landlords to a net loss of A$752.7 million for the year ended June 30, down from a A$1.62 billion profit a year earlier.
Shares fell as much as 4.5% on Wednesday before rallying slightly to be down 3.6% an hour before the close.
Dexus sold a downtown Sydney office building in June for A$393.1 million, a 17.2% discount to valuation, one of the few high-profile recent sales in a market frozen by a standoff between sellers and buyers.
Dexus Chief Executive Darren Steinberg said forced sales were off the cards because the developer had raised enough financing from banks and a recent note issue to fund its pipeline and would only sell assets to recycle cash into higher-yielding projects.
“This market has proven to be a lot more liquid than other markets around the globe because Australia is still screening really attractively,” he told Reuters.
The company signed a conditional deal to sell a second Sydney office building at 1 Margaret Street for A$293.6 million last month, according to its annual report, a 16% discount to its Dec. 31 book value.
“We don’t have to sell another asset to meet any of our requirements, development or otherwise,” Steinberg told analysts on an earnings call.
The company is well-supported by its banks, he later told Reuters.
Occupancy across Dexus’ portfolio of 62 office properties was 95.9%, the company reported. Roughly a third of tenancy renewals last financial year added floor space, versus 9% of those contracting.
Dexus reported adjusted funds from operations (AFFO), which excludes valuation changes and one-off charges, of A$555 million, down 3% from a year earlier.
“Dexus has operationally outperformed the market from their higher quality portfolio, however investors will remain cautious of global office fundamentals,” Citi analysts said in a note.
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Reporting by Nausheen Thusoo in Bengaluru and Lewis Jackson in Sydney; Editing by Shilpi Majumdar and Jamie Freed
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Hybrid-work trend may wipe out $800 billion from office property values by 2030, McKinsey study says
July 13 (Reuters) – A shift to remote working is likely to wipe off $800 billion from the value of office buildings in major global cities by 2030, according to a study published by consulting firm McKinsey on Thursday.
The survey on nine “superstar” cities — Beijing, Houston, London, New York City, Paris, Munich, San Francisco, Shanghai and Tokyo — showed that demand for office space would be 13% lower in 2030 than it was in pre-pandemic 2019.
“Superstar” cities are locations with a disproportionate share of the world’s urban gross domestic product (GDP) and GDP growth.
The survey said employees continued to spend far less time working at the office compared to pre-pandemic times. Remote working seemed to have contributed to migration away from prime cities, partly influenced by complete work-from-home models and cheaper housing availability in suburban areas.
In the aftermath of the COVID-19 pandemic, tenants have reduced their office real estate and several corporates have switched to a permanent hybrid work model.
“The decline in demand has prompted tenants… to negotiate shorter leases from owners,” said the McKinsey report, adding that short-term leases might make it more difficult for property owners to secure financing.
Besides rising vacancy rates, commercial property firms globally are battling steep declines in valuation of their properties as a surge in borrowing costs amid high interest rate environment forces investors to look at more profitable avenues.
Similarly, the impact could be stronger if troubled financial institutions decide to more quickly reduce the value of property they finance or own, according to the survey.
The McKinsey report comes at a time when world economies are navigating an array of macroeconomic challenges such as elevated inflation, high interest rate levels and mounting recession fears.
Reporting by Aby Jose Koilparambil in Bengaluru; Editing by Shilpi Majumdar
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June 29 (Reuters) – U.S. banking regulators are asking lenders to work with credit-worthy borrowers that are facing stress in the commercial real estate market.
Financial institutions should work “prudently and constructively” with good borrowers during times of financial stress, the agencies said in a statement.
The statement from the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corp, the National Credit Union Administration and the Office of the Comptroller of the Currency updates and supersedes the previous guidance on commercial real estate loan workouts issued in 2009.
Office loans have posed concerns for some U.S. lenders as property values decline and more borrowers default on their loans.
Federal Reserve Chair Jerome Powell earlier in the month said that U.S. commercial real estate lending remains under pressure but appears unlikely to threaten the broader financial system.
The new guidance contains short-term loan accommodations that includes an agreement to defer one or more payments, make a partial payment, or provide other assistance or relief to a borrower.
Banks represent 54% of the overall $5.7 trillion commercial real estate market, with small lenders holding 70% of the loans in that market, according to Citigroup analysts.
More than $1.4 trillion in U.S. commercial real estate loans will mature by 2027, with some $270 billion coming due this year, according to real estate data provider Trepp.
Reporting by Jaiveer Singh Shekhawat in Bengaluru; Editing by Maju Samuel
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May 16 (Reuters) – Land Securities (LAND.L) said on Tuesday it was likely to sell more assets than purchase after the British landlord swung to an annual loss, as surging interest rates and broader economic woes weighed on the valuation of its properties.
Rising interest rates and deepening macro-economic worries have dampened a tentative recovery in the highly leveraged British commercial property sector from pandemic lows, while the office space portfolio has struggled in the wake of evolving work habits.
The FTSE 100 firm said it expects low- to mid-single digit estimated rental value growth in London and major retail destinations this fiscal year.
The British property sector is still reeling under the impact of the mini budget last September, which led to a rout of government bonds and pushed borrowing costs higher, while the recent U.S. banking turmoil and the Credit Suisse crisis have led to tougher lending conditions worldwide.
Landsec, which has a 10.2-billion-pound ($12.87 billion) portfolio comprising office, retail, leisure, workspace and residential assets, said loss before tax came in at 622 million pounds for the year ended March 31, versus a profit of 875 million pounds last year.
The office space-focused firm said its EPRA (European Public Real Estate Association) net tangible assets – a key measure that gauges the value of its buildings – fell about 12% to 936 pence per share.
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Reporting by Aby Jose Koilparambil in Bengaluru; Editing by Sherry Jacob-Phillips
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