Is London’s office market a bargain?

published 23 October 2020

New York’s commercial property is in trouble, say Julia-Ambra Verlaine and Sebastian Pellejero in The Wall Street Journal. Last month only 10% of office workers in Manhattan had returned to their desks. The pain could spread beyond New York. Wall Street “slices” property loans and packages them as commercial mortgage-backed securities. Pension funds and asset managers worldwide participate in this “half-trillion-dollar” debt market, but prices are falling. Some lower-rated US commercial mortgage bonds are trading on between “70 cents to 50 cents on the dollar”.

London property is also in crisis, but these “comatose days” for offices “will not last forever”, says Jim Armitage in the Evening Standard. Post-pandemic, people will probably still head go to the office at least a few days a week. “Canny private-equity groups” such as KKR are swooping on London’s property companies, which trade on steep discounts to net asset value. Yet their focus is limited to firms with office exposure. The outlook for retail space is much grimmer.

London’s offices are suffering from “unprecedented uncertainty” because of the rise of homeworking, says a UBS Research note. But big companies may end up reducing their requirements for space less than expected. Steep discounts to net asset value and proven management teams mean that Derwent London (LSE: DLN) and Great Portland Estates (LSE: GPOR) could interest brave investors.