London-focused real estate groups are feeling the heat as the work-from-home trend creates a surplus of office space. Jefferies, a leading global investment banking firm, recently downgraded much of the sector due to these pressures.
According to the equity research team at Jefferies, led by Mike Prew, the technology sector experienced a decline in retail and now they predict that offices will be the next casualty. They estimate that London office utilization will contract by 20% as a result of remote and hybrid working arrangements.
As a result of these pressures, office vacancies in London have reached a 30-year high. Specifically, the West End of London has a vacancy rate of 7%, the City Of London stands at 10%, and Canary Wharf surpasses 20%. Jefferies, in a recently published note, also points out that historically, a rental recession tends to occur when vacancies reach approximately 8%.
In addition to the increase in vacancies, funding for the sector is also being affected by rising interest rates. The Bank of England is taking action to combat inflation that remains stubbornly above its 2% target. Jefferies states that “investment market liquidity is receding on rent uncertainty and squeezing developer profits.” This is particularly impactful in the City, where leverage is high and uncertainty regarding lease renewals from tenants has increased.
Due to these challenges, shares in London-listed real estate companies British Land, Land Securities, Great Portland, and Derwent London have all been downgraded by Jefferies. British Land and Land Securities were moved from a hold rating to underperform, while Great Portland and Derwent London were downgraded from buy to hold.
The London real estate sector now faces the task of navigating through these difficult times brought on by the work-from-home trend and rising interest rates.
Stock Market Update
The stock market experienced mixed results on Wednesday, with some major indices facing declines. The FTSE 100 UKX was down 0.3%, mainly due to a decrease in the shares of four companies. On the other hand, Ithaca Energy saw a rise of over 8% after receiving approval from the U.K. government for its offshore development project, Rosebank.
Global market sentiment remained cautious, as evidenced by the DAX losing 0.3% and the CAC 40 easing 0.1%. These losses were a result of the recent heavy declines on Wall Street.
In the Dutch financial sector, NN Group’s stock faced a significant drop of 15% after disappointing first-half results were released by the insurance and asset management group.
With regards to foreign exchange rates, both the sterling and the euro hit six-month lows against the dollar. Traders are speculating that interest rates in the U.K. and the eurozone may have reached their peak, while the U.S. Federal Reserve is still considering further policy tightening.
Interestingly, technical indicators suggest that the sell-off in European currencies may be reaching an extreme level. The relative strength index (RSI) for EUR/USD hit 22, and the RSI for GBP/USD fell below 14. These values are considered to be in oversold territory, with the last time GBP/USD RSI reaching such a low level being during the U.K.’s bond market turmoil a year ago. Subsequently, the pound experienced a sharp rally.
Overall, the stock market is facing its fair share of challenges, but opportunities for recovery and growth remain on the horizon.
