Both British Land and Land Securities have share prices that are significantly lower than the book value of the buildings they own.
The discount is how the stock market protects itself from the inherent illiquidity of commercial property. You can’t sell a bit of a big building and if you are a forced seller of the whole thing, you might have to accept less than you think it is worth.
This is one of the reasons why investing in commercial property through an open-ended fund, one that is obliged to meet redemptions on a daily basis if necessary, is a bad idea.
But assuming you have dealt with the liquidity issue by investing via a closed-ended fund such as a REIT (real estate investment trust), the market’s scepticism about the outlook, expressed through the discount, can be your friend.
With discounts of 40pc or more today, this feels like one of the rare moments in investment when Mr Market is handing out something for nothing.
It is always darkest just before the dawn and markets move not when the sun rises but when the first glimmers of light appear on the horizon. Both of this week’s results announcements offered a glimpse of brighter times ahead.
British Land said it expects rents to grow at the top end of its previously forecast range as it pointed to a vacancy rate of 4pc, around half the sector average.
And it is not just talking the talk. When Facebook-owner Meta recently walked away from an unwanted tenancy agreement and offered a replacement tenant, British Land turned it down. It preferred to take the eight-storey building near Regent’s Park back onto its books because it believes it can strike a better deal today than it did when it signed the contract with Meta two years ago.
Land Securities, meanwhile, said this week that it expects to be putting the money it raised last year from property sales back into the market next year at more favourable prices.
Its confidence is underpinned by the fact that occupancy rates are a lot better than they look on the surface. The company said that 40pc of vacant space is in just 1pc of buildings. Ignore these possibly obsolete properties and the rest of the market is tighter than it seems.