UK Property stocks: time for bottom fishing?
The reputation of commercial real estate stocks among retail investors is sullied. With the possible exception of the internet and technology sector at the beginning of the decade, never has an industry been held in such low esteem by the investing public. But does the old adage about the retail money and smart institutional money always flowing in opposite directions hold true: is there value in European property stocks?
John Perry: worse-case scenario is priced in
The stock market began to anticipate problems in the commercial real estate sector before the worst news appeared. "The listed UK property sector fell by around 40% from January to November 2007, by which time [investors] appeared to be pricing in a worst-case scenario and then some," notes John Perry, head of pan-European real estate research at Deutsche Bank in London. To some extent these falls were merely mirroring the reality in the commercial real estate market. IPD’s UK index fell 3.6% in November and 3.7% in December – the largest falls ever recorded (the previous largest fall was 1.8% in May 1990). However, while the speed and severity of the falls were spectacular they must be considered in context.
"The scale of the falls reflects a fundamental change in the way in which valuations are conducted," says Perry. Whereas previously third-party valuations depended on transactional evidence – which in a weak market was scarce and therefore led to slow and lengthy falls in values that undermined confidence – now they are allowed to factor in market sentiment.