Schroder Real Estate (SREI) fund manager Duncan Owen said rival investors trying to offload property at pre-lockdown prices are ‘smoking dope’ as he predicted valuations would tumble another 10%.
The property market has taken a hit in the Covid-19 crisis as surveyors were unable to provide accurate valuations with lockdown rules in place and fears of an impending recession saw transactions grind to a halt.
Owen, who is head of global real estate at Schroders as well as co-manager of the £211m real estate investment trust (Reit) with Nick Montgomery, said in the past four weeks ‘deal flow has considerably increased’ but that prices being asked by sellers, which include some open-ended funds looking to raise cash and return from suspension, were not taking the impact of coronavirus into account.
‘Vendors are smoking dope,’ he said. ‘They are asking for [pre-virus] prices and they are not going to sell at those prices.’
He said there was ‘no urgency’ to buy as ‘the market will soften’, predicting commercial property had ‘another 10% to fall and retail maybe another 20%’. Industrial warehouses may escape the falls but Owen said they traded on ‘pretty full prices’.
‘Valuations and prices will be lower in September,’ said Owen. ‘Some deals have been completed in the market but they tend to be the ones agreed before lockdown and there are very few new deals that are beginning that have been completed.’
He added that he would ‘be disappointed if we did not buy this year’ but paying the right price for a property in a ‘winning city’ was the priority.
Offices could present an interesting opportunity as workers would eventually return from working at home, but only if ‘you get the right building that has care and wellness [of employees] at its heart’ and those properties will ‘get a premium rate’.
When SREI does find the right property it has £85m of cash to deploy thanks to £95m of sales at a good price and low yield of 3% in the year to 31 March, which Owen said ‘you would not be able to get now’.
Selling assets to raise cash just before the pandemic hit was ‘good luck’, admitted Owen, although he said he and Montgomery had readied the portfolio for a ‘market correction’ of some sort.
Some of the £95m was used to pay for refinancing of a £129.6m loan, which will save the Reit £2.5m a year in interest with the term extended to just over 16 years. While investors will reap the benefits of the refinancing over the long term they have suffered a hit to the net asset value (NAV).
Before refinancing costs the NAV declined 5.4% to £309.8m in the year but, with the early repayment penalty of its previous loans and other related costs included, the hit to NAV leaped to just over 13%.
Owen (pictured) said that despite the underlying fall in NAV the real estate portfolio outperformed its MSCI IPD benchmark by 1.7% over the same period, and by 1.7% over the past three years.
The £85m cash will not be used to immediately reinstate SREI’s dividend, which was originally due to be paid this month but was postponed in April. Instead shareholders have encouraged the managers to invest the money and build long-term returns.
‘We talked to our top 10 shareholders and the message we got was do not cannibalise the advantage we have in cash by distributing now when we could earn better returns for shareholders by deploying it,’ he said.
Owen said the Reits that have continued to pay their dividend will ‘look foolhardy’ if the country enters into a ‘deep depression’ and ‘could really regret it’.
He said the reinstatement of the dividend will depend on how much rent the Reit is able to collect in the quarters beginning June and September.
‘We have received three-quarters of rent [this quarter] and of the rent not yet recovered we think we will recover two-thirds in arrears,’ said Owen.
‘If we’ve got our figures right then we can probably recover 90% of rent…and that could allow us to pay 50% of the dividend [once the fixed costs are taken into account].’
At 38p SREI shares trade at a 37% discount to their end of March NAV per share of 59.7p. This is wider than the average 25% discount in its sector, said Numis Securities and could offer long-term value.
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