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High Priced UK Towers Signal Market Trend

When UK property company Landsec sold its interest in the ‘walkie talkie’ skyscraper to Lee Kum Kee, a Hong Kong company that produces oyster sauce, the deal was exceptional on several levels.

The £1.3bn price tag, which included Landsec’s 50% interest, was 13% above its book value and broke records for a single UK tower. Numis Securities stated that the deal came as Landsec was trading at a discount of 29% to the value of its assets.

This disconnect between the private and public markets has been typical of UK property transactions this year. Individual property deals are setting records while discounts to overall asset value on property investment trusts are at their highest in five years.

Similar discounts were witnessed during the financial crisis in 2008 and 2009. While conditions are different now, certain analysts continue to anticipate an upcoming market slide.

Jefferies analyst Mike Prew said that concerns exist over a future correction in net asset value. He said that how soon that will happen depends on factors that are challenging to measure, such as the outcome of Brexit and the influx of foreign money into the market.

UK politics are also a potential influencer: experts say that the property investment trend may depend on the ability of the nation’s leaders to facilitate a smooth Brexit transition. Otherwise, global capital could depart as easily as it arrived.

Agents say that UK tower prices are being boosted by the honour of owning a high-profile trophy asset, but the stock market is valuing the wider portfolios of property companies at a steep discount, even after management costs are accounted for.

Property group British Land, for example, is trading at a discount of 34% while the average real estate investment trust is trading at 19% below net property value. As a result, Landsec and British Land are returning money to investors after selling major assets instead of reinvesting it. The latter, which sold a 50% interest in the Leadenhall Building (aka the ‘Cheesegrater’), is carrying out £300m worth of share buybacks while Landsec is doing a share consolidation and paying a dividend of 60p a share.

 

 

Individual building prices are being driven in part by money from Hong Kong and China. They have not been deterred by falling rents, which have been a phenomenon for three consecutive quarters. Analysts say that the volume of incoming Asian capital is driven by high surpluses in capital at home, combined with the low pound sterling and quality of London property assets.

Other UK tower owners appear to be willing to take advantage of the moment. Insiders familiar with the situation said that property developer Heron International is seeking buyers for its share in a tower at 110 Bishopsgate. Heron, which was originally founded by real estate magnate Gerald Ronson, has not commented.

Numis research associate Paul Gorrie said he expected the sideways trading along real estate investment trusts to continue for the next couple of years before sloping downwards.

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