Chief investment officer Patrick Armstrong is betting that a number of global commercial property stocks are set to slide further. Armstrong, who manages equity strategy at wealth manager Plurimi, told CNBC Pro Monday that he has short positions in the shares of London-listed British Land , U.S.-listed Simon Property , Frankfurt-listed Vonovia , and Hong Kong-listed China Vanke . Investors who hold short positions benefit when a stock falls. They do this by borrowing shares from other investors to sell immediately; they then repurchase the shares later when the price is lower and profit on the difference. The strategist believes commercial property stocks are overvalued even at their current levels as lack of demand and higher borrowing costs persist. “Work from home has reduced demand for office property and has also decreased demand for urban property,” Armstrong said. “Shopping online has reduced demand for shopping malls — so we are short a wide range of property companies.” It comes as a growing number of investors and regulators raise concerns about the sector as higher interest rates have increased the cost of borrowing and depressed valuations. Earlier this month, veteran investor and Warren Buffet’s sidekick Charlie Munger said he believed there is “trouble” lurking ahead of the U.S. commercial property market . In April, meanwhile, the European Central Bank warned of “clear signs of vulnerability” in the property sector, citing “declining market liquidity and price corrections” as reasons for the uncertainty. British Land The negative sentiment can be seen in the share price performance of the property stocks. For instance, shares of British Land have fallen by around 10% this year and remain down by more than a third from their pre-pandemic levels. The company has also acknowledged the trend and marked down the value of its portfolio by 12.3% to £8.9 billion ($11.1 billion) last week, sending its stock lower. Yet, Armstrong expects further declines. “British Land net asset values fell more than most analysts expected, and I am not convinced the valuations are rock bottom yet,” he said. “It’s an expensive company, in my opinion, that’s facing a pretty toxic environment.” Armstrong is also not alone in his bearish view on British Land. Hedge funds have 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 made to U.K. regulators. 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 feet of commercial real estate across three office buildings, retail parks, and logistics centers. But, Armstrong said its concentration around central London has made it a “headwind to growth”. “In London, vacancy rates will likely continue to rise. New supply is increasing while demand is decreasing,” he added. He said he would close his short position on the company, “if the stock fell another 15% … assuming a similar interest rate environment.” Close to ‘fairly valued’? Economists at London-based consultancy Capital Economics have a more optimistic take on the commercial property sector, however. They noted that while property stocks as a whole looked overvalued, this was primarily driven by industrial property valuations remaining markedly higher. “Indeed, offices and retail are now at, or very close to, fairly valued,” said Matthew Pointon, senior property economist at Capital Economics, in a note to clients on May 17. “And, given a stronger rent outlook, we doubt industrial yields need to rise much further this year.” Meanwhile, European real estate company Vonovia also made it into Goldman Sachs’ list of “conviction buy” stocks this year. The Wall Street bank expects it to rise to 37.30 euros ($40.20) over the next 12 months, giving it nearly 115% potential upside. The stock is also part of the investment bank’s “high dividend yielders” and “value buys” stock screens.
