Chief investment officer Patrick Armstrong is betting that a number of global commercial real estate stocks are set to fall further. Armstrong, who manages equity strategy at Plurimi Wealth Management, told CNBC Pro on Monday that he has short positions in shares of London-listed British Land, US-listed Simon Property, Frankfurt-listed Fonovia and Hong Kong-listed China Funky. Investors who hold short positions benefit when the stock is down. They do this by borrowing shares from other investors to sell them immediately; Then they buy back the shares later when the price goes down and profit from the difference. The strategist believes commercial real estate stocks are overvalued even at current levels with continued lack of demand and high borrowing costs. “Working from home has reduced the demand for office property as well as the demand for urban real estate,” Armstrong said. “Online shopping has reduced demand for malls – so we’re shorting out a whole lot of real estate companies.” It comes as a growing number of investors and regulators are raising concerns about the sector as higher interest rates have pushed up the cost of borrowing and lowered valuations. Earlier this month, veteran investor and friend of Warren Buffett, Charlie Munger, said he believes there are “problems” lurking ahead for the US commercial real estate market. Meanwhile, the European Central Bank warned in April of “clear signs of weakness” in the real estate sector, citing “declining market liquidity and price correction” as reasons for uncertainty. British Territories The negative sentiment can be seen in the share price performance of property stocks. For example, British land shares have fallen by around 10% this year and remain more than a third down from pre-pandemic levels. The company also acknowledged the trend and cut the value of its portfolio by 12.3% to 8.9 billion pounds ($11.1 billion) last week, sending its share lower. However, Armstrong expects more declines. “UK net asset values have fallen more than most analysts had expected, and I’m not convinced valuations have hit rock bottom just yet,” he said. “It’s an expensive company, in my opinion, that faces a very toxic environment.” Nor is Armstrong alone in his downward view of the British land. Hedge funds raised their total short interest to 2% of the company’s free float, from 0.7% at the start of the year, according to disclosures filed with UK regulators. BP did not respond to CNBC’s request for comment. BLND-GB 1Y LINE The 167-year-old company is diversified and operates 21.3 million square feet of commercial real estate across three office buildings, retail parks and logistics centers. But Armstrong said its focus around central London made it a “headwind to growth”. “In London, vacancy rates are likely to continue to rise. New supply is increasing while demand is diminishing,” he added. He said he would close his short position in the company, “if the stock drops another 15%…assuming a similar interest rate environment.” Close to “fairly valuable”? However, economists at London-based advisory firm Capital Economics have a more optimistic view of the commercial real estate sector. They noted that while real estate stocks as a whole appeared overvalued, this was primarily driven by industrial property valuations which remained significantly higher. “In fact, office and retail are now at or very close to fair value,” Matthew Boynton, chief real estate economist at Capital Economics, said in a May 17 note to clients. Industrial yields should rise much more this year.” Meanwhile, European real estate firm Vonovia is also on Goldman Sachs’ list of “buy on conviction” stocks this year. The Wall Street bank expects it to rise to €37.30 ($40.20) over the 12 months. ahead, giving it a potential upside of about 115%.The stock is also part of the “high-dividend” stock and investment bank monitors.
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