Real Estate

Chris Hughes is a Bloomberg Gadfly columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.

London's Cheesegrater building is as close as Britain gets to a memorial to Brexit.

Construction of the wedge-shaped skyscraper in the heart of the city's financial district started in 2011 as things were picking up after the financial crisis. Within three weeks of the European Union referendum, the tower was fully let. At the time, its co-owner, British Land Plc, said the building's popularity testified to capital city's enduring appeal.

Now the Cheesegrater is attracting potential buyers, British Land says. Just maybe, investors are ready to jump in and take a meaningful risk on parts of the U.K. commercial real estate market.

The putative acquirer is an investment vehicle linked to Chinese property magnate Cheung Chung Kiu, which has dangled 1 billion pounds ($1.2 billion) to see off interest from the likes of Temasek Holdings, the Singaporean sovereign wealth fund, according to CoStar News.

What's striking is that investors are considering committing capital in size to London right now. It's just weeks before Prime Minister Theresa May is due to start the formal withdrawal process from the European Union, with unpredictable consequences for the city as a financial and business center.

The recent trading updates from the big commercial property groups have broadly shown that there is, for now, still demand to occupy London offices. Commitments by the likes of Apple Inc. and Google-owner Alphabet Inc. are the most visible signs of a market that's holding up.

This state of affairs means decent assets should find competing buyers despite Brexit nerves, at prices close to net asset value. But that's very much at odds with the equity market's view of the situation.

Brexit Battering
Reat estate shares have trailed the FTSE 100 benchmark since the June vote
Source: Bloomberg

Real estate was one of the worst-hit industries following the Brexit vote. The big firms are trading at discounts of 20 to 30 percent of NAV, having hovered at or above that during 2014 and 2015, Bloomberg data show.

Below NAV
The large British real estate developers are trading at a discount to net asset value
Source: Bloomberg

The mystery is that there have been no takeover bids for whole companies. Those discounts would, in theory, enable predators to afford to pay a premium to acquire a real estate group -- instead of paying full prices for individual assets. For dollar investors, the listed sector is cheaper still, as this chart shows.

Yet these stocks languish unloved. 

One problem may be that sprawling groups could contain things buyers dislike, such as shopping malls. What's more, bidders might suspect, rightly, that investors won't roll over at an offer that does no more than erase post-referendum losses. After all, many shareholders are in property for the income. Cashing out just forces them to hunt for something with a comparable yield. Not easy.

Income Stocks
Investors may be unwilling to part with stocks with above-average dividend yields
Source: Bloomberg
Estimatd dividend yield for the next 12 months

Brexit uncertainty looms large too. No buyer will want to be caught out by a sudden collapse in values. The Cheesegrater is fully let. That won't apply to every asset in a listed firm.

Even so, at current prices, dollar acquirers would have quite a cushion against future shocks if they were to buy a developer instead of a development.

--Gadfly's Elaine He contributed graphics.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Chris Hughes in London at chughes89@bloomberg.net

To contact the editor responsible for this story:
Edward Evans at eevans3@bloomberg.net