Chief Investment Officer Patrick Armstrong expects a number of global commercial real estate stocks to fall further. Armstrong, who manages equity strategy at wealth manager Plurimi, told CNBC Pro on Monday that he was short shares in London-listed British Land, US-listed Simon Property, Frankfurt-listed Vonovia and Hong Kong-listed China Vanke holds. Investors who hold short positions benefit when a stock falls. They do this by borrowing shares from other investors to sell immediately; You then buy back the shares later when the price is lower and profit from the difference. The strategist believes commercial property stocks are overvalued even at current levels as lack of demand and higher borrowing costs persist. “Working from home has reduced demand for office real estate and has also reduced demand for urban real estate,” Armstrong said. “Online shopping has reduced demand for malls – so we’re missing a lot of real estate companies.” This is happening as more investors and regulators are raising concerns about the sector, as higher interest rates have pushed up borrowing costs and depressed valuations. Earlier this month, veteran investor and Warren Buffett’s sidekick, Charlie Munger, said he believes the US commercial real estate market has “trouble” lurking. In April, meanwhile, the European Central Bank warned of “clear signs of vulnerability” in the real estate sector, citing “declining market liquidity and price corrections” as reasons for the uncertainty. British Land The negative mood can be seen in the price development of real estate shares. For example, shares in British Land are down about 10% this year and are still more than a third below their pre-pandemic levels. The company has also caught the trend, slashing the value of its portfolio by 12.3% to £8.9 billion ($11.1 billion) last week, causing the stock to fall. Still, Armstrong expects further declines. “British Land’s net asset value has fallen more than most analysts were expecting and I’m not convinced valuations have bottomed yet,” he said. “I think it’s an expensive company that’s in a pretty toxic environment.” Armstrong isn’t alone in his pessimistic view of British Land. According to UK regulators, hedge funds have increased their overall short interests to 2% of the company’s free float from 0.7% at the start of the year. British Land did not respond to CNBC’s request for comment. BLND-GB 1Y line The 167-year-old company is diversified and manages 21.3 million square meters of commercial real estate in three office buildings, retail parks and logistics centers. However, Armstrong said the concentration on central London has resulted in “headwinds for growth”. “In London, vacancy rates are likely to continue to rise. The supply of new jobs is increasing while demand is falling,” he added. He said he would close his short position on the company “if the stock fell another 15%…assuming a similar rate environment.” Nearly “fairly valued”? However, economists at London-based consultancy Capital Economics are more optimistic about the commercial real estate sector. They found that while real estate stocks looked overvalued overall, this was mainly due to the still significantly higher valuations of industrial real estate. “In fact, offices and retail stores are now valued fairly or near fair,” said Matthew Pointon, senior real estate economist at Capital Economics, in a May 17 note to clients. “And given the better rental prospects, we doubt it.” Industrial earnings need to grow much further this year.” Meanwhile, European real estate company Vonovia also made Goldman Sachs’ list of “Conviction Buy” stocks this year. The Wall Street bank expects the price to rally to $40.20 over the next 12 months, which represents nearly 115% upside potential. The stock is also part of the investment bank’s “High Dividend Yield” and “Value Buys” stock screenings.
