Varecon 01

Ltd

I am sure that I am not alone, and that many property professionals have been busy investing or trading recently in the quoted UK property companies, housebuilders, and property-secured debt investment companies (direct, CMBS and/or RMBS). The referendum vote caused a knee-jerk reaction, with virtually all of the equity stocks' prices falling dramatically and, in most cases, precipitously. Some of those falls may well have been overdue, as some stocks were at local highs, and investors were being over-optimistic about the economic prospects for the UK, where are generally now being downgraded. (Brexit is often the reason given for such downgrades, but that is more likely the excuse for correcting an over-optimistic assumption). But there was also an almost panic reaction to the result of the vote, with any stock having strong domestic, as opposed to export, exposure being automatically down-priced. Subsequently, there has been something of a recovery in the domestic stocks (FTSE250 as a proxy) which, almost by definition, includes the housebuilders and property companies but few, if any, are close to their 12-month highs. Shorting of the more liquid stocks appears to be easing, so pricing is being increasingly driven by investors’ views on the fundamentals of the stocks. Those investors who liquidated a significant part of their portfolios prior to the vote have been in a fortunate position of being able to buy at prices that some regard as being particularly attractive. Of course, we could be completely wrong, and investment yields of commercial property could rise (further in some cases) or occupancy rates fall, thereby negating the pricing discounts to NAVs which it is possible to secure at current levels. Similarly, concerns about the future could dissuade potential house purchasers from buying and that would adversely affect the housebuilders’ profitability. However, these markets have a certain degree of cyclicality and, provided one is selective in the acquisitions, there is the prospect of a recovery as a potential target some time in the future. At least the starting price is not as excessive as it would have been a few months ago. For obvious reasons, nobody posts on LinkedIn, or elsewhere, when they have bought shares in British Land or in Berkeley Group. These are just market transactions and there is no reason to be proud of buying in the market. Presumably, half the people who are in the market (the would-be sellers) think that the price is too high while the other half (the would-be buyers) believe it is too low. That is what gives liquidity to the assets. The time to be proud about the transaction is when the holding is eventually sold, when (hopefully) the gain can be shown and the returns calculated, and compared with some benchmark. But we do see, in press releases and on LinkedIn, fund managers and property companies announcing the purchase of an office building or a shopping centre or something similar. The acquisitions are often framed in superlative terms, so that the acquisition is of some exceptional building, in a prime location, having unique qualities. All of this is, however, presumably reflected in the purchase price, unless the vendor or competing buyers are stupid or naive. For the buyer to imply that they are is the height of arrogance. As with shares and other assets, the real time to claim that this was a ‘good buy’ is when the property is subsequently sold. The purchaser can then demonstrate that its analysis of the asset's prospects was superioer to that of the vendor and of other players in the market, who failed to bid high enough. In that respect, the most credible announcements would come from the property’s vendor who might be able to claim that he has off-loaded a property at significantly above its purchase price, out-performing the market, and perhaps sold at a cyclical peak, thereby getting the timing right. Yet, strangely, it is the purchaser who is typically claiming some advantage, even though such an advantage cannot be identified. Rarely is the purchase price provided. It is unknown to see the yield or the rental income detailed. Any of these would help the professional reader understand whether this sounds like a reasonable acquisition or not. The reality is, of course, that the purchaser is reluctant to provide this information, in case it opens its investment decision to criticism in the investment community. This, if anything, implies a lack of confidence in the investment decision. If such information was provided, one could understand that some readers would take a ‘view’ on the acquisition. Those who believe the price to be sufficiently low and the prospects to be sufficiently good, might be inclined to provide it with a ‘like’. Without that information, those who do ‘like’ it are just voting blindly and damaging their own professional credibility. We really need more rational perspectives in real estate.

Prime, by its definition, continues to attract shoppers and retailers, but it is a shrinking part of the sector