(Bloomberg) --

UK property values could fall by 20% after the government’s mini-budget last month led to a steep rise in borrowing costs for landlords, according to analysts at Goldman Sachs Group Inc.

The increase in UK bond yields since Chancellor Kwasi Kwarteng’s statement will impact real estate returns, which typically offer a premium over government debt, Goldman analysts, including Tom Musson, wrote in a note this week. While the bank sees property values across Britain falling by as much as a fifth, publicly traded landlords under its coverage could see the value of their portfolios decline as much as 12% between June this year and December 2024, the note said. 

Even before the latest surge in UK bond yields, commercial real estate had appeared on the cusp of a potentially brutal re-pricing, as a decade of low or negative interest rates came to an end. The shares and bonds of property firms have fallen sharply and the moves are starting to filter through to transactions as well. For instance, Land Securities Group Plc sold Deutsche Bank AG’s new London headquarters in September at a price about 15% lower than the initial bids received shortly before Russia’s invasion of Ukraine. 

Goldman said the publicly traded UK landlords it covers could see their cost of borrowing rise by 75% over the next five years to more than £700 million ($775 million), if rates remain at current levels. At the same time, a worsening outlook for the economy will limit most landlords’ ability to pass on inflation in the form of higher rents, outside of particularly in-demand sectors such as warehouses, the bank added.

“Given a weakening UK macroeconomic outlook, we expect some renewed pressure on retail landlords over the next 12 months, and also do not think energy price inflation passes through unfelt, particularly for lower margin tenants,” Musson wrote.

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