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Is London commercial property an opportunity?

London property under construction, circa 2011

For various reasons, I don’t write much about my active investing these days on Monevator.

One reason is we’ve found our niche explaining why you should ignore 90% of what’s written about investing in the popular press and instead invest passively.

In that light it’s no fun having to re-explain my antics to people who read Monevator for the passive material and who – understandably – get perplexed by what I’m up to.

(This series is my best explanation if you’re interested.)

The schism is made worse by my passively pure co-blogger The Accumulator still being mainly away writing the mythical Monevator book.

We used to do passive posts Tuesday, active Thursday, and the free-for-all links on Saturday.

But with that routine constipated due to a lack of Accumulated fibre, there seems to be even more upset and indigestion when I go off-piste.

Golden years

But there’s another big reason why I’m not writing so much about my active ideas at the moment.

And that is I haven’t got so many convincing active ideas!

There’s a passage in The Snowball, Alice Schroeder’s biography of Warren Buffett, where she talks about how in the 1950s Buffett kept finding “golden apples” lying around on the floor – and he could barely believe they hadn’t been picked up.

Hindsight is wonderful – and I know my stock picks didn’t always feel like no-brainers at the time – but still, that’s a little like how I felt between 2009 (when I was pretty sure the market was cheap) and 2013 (by when most things had been re-rated).

For instance, consider UK commercial property REITs, which appeared a good bet to me in the aftermath of the credit crisis.

As late as December 2011 I was able to write that:

If you believe the pessimism about Europe and the global economy is overdone, then some REITs offer good yields as well as seemingly undervalued assets for you to snap up.

In that article I suggested diving deeper into the small cap end of the property market, highlighting six companies I thought looked interesting.

Here’s how their share prices did between then and now:

Company Gain
Daejan 115%
J Smart 31%
McKay Securities 75%
Mountview Estates 163%
Mucklow Group 73%
Panther Securities 1%
Average 77%
FTSE All-Share 31%

Source: Google Finance / Yahoo Finance

Golden apples, alright.

I don’t have total return data to hand, unfortunately, but taking into account dividends the outperformance of these six shares versus the wider UK market would be even better – and income is often the major attraction of holding commercial property.

Of course I owned a lot more in my portfolio than just these winners. In fact at the time of that article from memory I held precisely none of them, though I was buying various UK commercial property firms on and off throughout the period.

But that isn’t my point here. I’m simply highlighting that bargains could indeed be found strewn about a few years ago, at least the way things turned out. (“Things” including no UK recession or Eurozone implosion, and continued easy money from the Central Banks).

Brexit bargains

It’s been tougher sledding recently. Aside from the odd bit of “plunging” during market sell-offs, I’ve been mainly hunting around in commodities and energy companies, emerging markets, and financials over the past 12-18 months.

These have been anything but easy buys, and not always good ones.

I’ve repeatedly traded around my UK and US bank positions as they’ve waxed and waned, for instance, and while emerging markets have come good, I was optimistic too early. Energy has been strong in 2016, but 2015 was carnage.

However this year did provide one great buying opportunity – at least in retrospect.

The market was chaotic in the hours and days that followed the Leave win in the EU Referendum, as terrified investors raced to dump their UK shares.

I should know, because as an avowed Brexit-phobe I was among the dumpers.

In the weeks afterwards I felt I’d done okay getting through Brexit intact, especially considering how surprised I was by the result. I saw my portfolio rally like everyone else, and I tried to forget about the two or three holdings I’d sold at steep discount in the aftermath.

However it’s become obvious that as an active investor I left money on the table.

I’m not even talking about the crazy buys you could make the morning after the vote before.

Yes, in theory you could buy big UK banks at 20-30% or more down, but liquidity was non-existent. You had to buy blind, and you could only guess at what we now know – that a systemic crisis was not underway.

I’m thinking more about the good companies that were marked down in the sell-off and took some weeks to recover, even as the smoke cleared.

I picked up a couple of things, but overall I was too timid (partly, no doubt, because of my feelings about Brexit, even as Britain’s post-vote resilience has confounded me).

Six of the best

There does remain one corner of the market that I feel is still suffering from a Brexit hangover, however. While it might not be exactly strewn with golden apples, I think it’s probably not stuffed with rotten ones, either.

To go full circle, that corner is commercial property – specifically the big UK real estate investment trusts (REITs).

The REITs fell in the wake of Brexit and the coincident closure of several property funds, and they have not yet fully recovered.

The following table shows how the six largest such REITs are priced relative to their recent-ish peaks, and also their price-to-book value (a measure of the premium or discount of their price compared to the value of the assets on their books).

Company Decline from
12-month peak
Land Securities -23% 0.7
British Land -28% 0.7
Hammerson -11% 0.8
Segro -2% 0.96
Intu Properties -18% 0.8
Shaftesbury -2% 1.15

Source: Google Finance and Company Refs

Well, that’s an interesting table, isn’t it?

The first thing I’d say is that dramatic as some of these falls are, prices have bounced since the bottom of the Brexit sell-off.

Shaftesbury fell 14% the day after the EU Referendum, for example, to hit 822p. It’s since risen 18%. And while British Land is still dramatically below its highs, it got as low 545p in the wake of Brexit, compared to today’s 632p.

So the panic seems to be wrung out, even if some of these shares are still languishing.

The more interesting column for me though is the price-to-book ratio.

In the case of British Land, for example, it most recently declared its net asset value per share to be 919p as of the end of March 2016.

In theory then, if you buy British Land shares today for 631p, you’re getting a 30% discount to their underlying value.


Well maybe – but things are obviously not quite so simple.

Why the discounts?

There are many reasons why REITs might trade at a discount to their net asset value (that is, NAV or book value):

1) NAV too high: Investors might not trust the NAV, either because they suspect it was over-stated at the time the accounts were filed, or because they think that underlying prices (buildings, in the case of REITs) have fallen since then.

2) NAV will fall: Investors may fear that prices are going to fall in the future, and so try to factor that into their purchase price now.

3) Supply and demand: Perhaps the typical investor believes the NAV is just dandy and reflects reality, but there simply aren’t enough buyers around compared to people selling for whatever reason to hold up prices.

4) Dividend yields can be a factor. If alternative yields are more attractive, dividend-minded investors may not buy REITs until the yield becomes competitive, which could cause their share price fall to increase the yield, even if the underlying NAV is unchanged.

5) General uncertainty: If you’re less sure about the future of the economy or the markets, you’ll typically demand a bigger discount. This is especially true in the case of REITs, where the underlying holdings (buildings!) can take months or years to sell, and where some of the NAV may include developments that haven’t yet been built or sold.

All these factor interrelate, of course. For instance it’s unlikely that investors will be demanding steeper discounts to NAVs and higher yields without something similar going on in the real-world market for physical property.

I should mention here that commercial property has its own sub-language, especially in the US, which talks about ‘cap rates’ and so on. At the end of the day though the metrics of investing are the same.

There a few fundamentals worth keeping in mind with commercial property, however:

  • It is illiquid. You know how it can take an age and a small fortune to sell your house? Same here.
  • Rents can be illiquid, too, for want of a better word. Rent reviews may be upwards only, for instance, so tenants cannot theoretically negotiate discounts. But they can go bust, so… Also at times of high inflation, rents may not keep pace (which can be a bit of a knock on commercial property’s inflation-fighting credentials in the short-term).
  • Commercial property is fueled by debt, just like manure grows crops.
  • The front line of the sector is speculative. Combined with all that debt, this means commercial property goes through cycles of booms and busts, especially in big cities.

I’ve written more about commercial property if you’re interested.

Opportunity knockers

So are these big REITs on a discount screaming buys?

Who knows – but I do think they’re worth a second look.

True, when you see discounts of 30% or more to book value, you might think the market knows something certain about their underlying NAV.

And there are dark clouds around, for sure. Negative voices were calling the top of the UK commercial property market even before Brexit threatened to send tens of thousands of bankers and related office jobs overseas.

However there’s not much sign so far that property prices have slumped 30%, or anything like it. In fact we’re only a few percent down since Brexit, and the pace of decline even in the capital is slowing.

The take-up of office space in London bounced back relatively quickly after Brexit, too.

Also, if you believe that the big discounts to NAV reflect the market cunningly sniffing out an imminent London property crash, then you have to square London-centric Shaftesbury trading near NAV with, say, Land Securities trading at 0.7x.

Their portfolios are not exactly the same, sure. But they share enough in common that the idea one could be slammed while the other sales through unmolested seems fanciful.

The big REITs are in general not highly-geared, either – certainly they’re not overloaded with debt like they were back in 2007 ahead of the last downturn.

This all raises the possibility that there’s a dislocation here in terms of price and value.

Popularity contest

Price-to-book ratios do definitely swing about in this sector.

In the two years between spring 2013 and spring 2015, for instance, British Land mainly traded at a premium to book value. (i.e. The price to book ratio was over 1x.)

Premiums may be justified if investors have correctly anticipated further gains to come – perhaps because the future value of development projects are modestly carried on the books, or because underlying prices for offices or shops are rising faster than company accountants can keep up.

But fluctuating ratios just as often reflect changing sentiment, too.

I can’t help noticing that the three companies with the largest discounts in my table are the three largest UK REITs. This trio alone comprises about 35% of the iShares UK Property ETF.

I wonder if they’ve been sold off more harshly – or have taken longer to recover – precisely because they’re so big and relatively liquid?

I read somewhere that open-ended commercial property funds were holding REITs in lieu of cash, and selling them when investors began redeeming their funds after the Brexit vote. Perhaps that’s piled on the pressure?

Because I remain relatively unconvinced about the UK and London’s medium-term prospects (I mean compared to the more positive view I had of the business-as-usual scenario rejected by voters in June) it’s hard for me to get super-excited about this apparent opportunity.

However I’ve had a nibble of Land Securities and British Land, among the big REITs I’ve mentioned today, and I may well buy more.

Time will tell if there’s a worm in these apples!

As mentioned I own shares in Land Securities and British Land, so who knows what biases are influencing my thinking. As always this piece is NOT a recommendation that you or anyone else should buy any shares mentioned. You must do your own research, and make your own decisions. Good luck. 🙂

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{ 23 comments… add one }
  • 1 Neverland September 22, 2016, 9:43 am

    To someone ordinarily resident (in the tax sense) in Britain doubling down on exposure literally dug into the ground in the UK doesn’t seem too clever to me, unless the price is unequivocally right

    I’ve seen NAV discounts in closed end property funds in the low 30s in the past …blood was really flowing in the streets

    As for London/SE property generating exceptional gains in the past, the past is no guide to the future as they like to say in the small print

    Personally I would just continue with my boring regular investment index fund buying and wait for a real clear bargain before doing anything unusual

    Remember it took over a year from the start of the financial crisis for Lehman to go bust

    Brexit could well be even slower burn as the nature of the damage is not an immediate liquidity issue like the credit crunch

    Also there seems to be a political acceptance in the UK that the currency will take much of the hit

  • 2 ermine September 22, 2016, 10:03 am

    > Aside from the odd bit of “plunging” during market sell-offs

    I have mental images of TI short selling there. Not quite sure that’s what you meant, though it was Livermore’s stock in trade and earned him the moniker of ‘Boy Plunger’

    Now shorting takes cojones of steel! Oh and I’m glad to see the odd active post sneak in there 😉

  • 3 Mark September 22, 2016, 11:34 am

    One factor to consider with central London commercial property is that many of the buyers are overseas, and they don’t need as much of a discount as a domestic investor to justify carrying the Brexit risk, because the weaker Pound is on their side. Moreover, I’d argue it’s precisely that category of property, particularly prime office buildings, that are most likely to be affected by the poll result, as overseas companies and banks decide that perhaps Frankfurt, Paris or Dublin would be a safer bet.

    In the sell-off that took place in late June, REITs focused on property outside the capital also saw falls, and it’s those I’d buy. The value of underlying assets such as logistics warehouses off the M1, shopping centres in the provinces and care homes is less dependent on international investors and the underlying demand for the properties is less sensitive to the amount of inward investment over the next two or three years.

  • 4 Neverland September 22, 2016, 1:04 pm


    When there is a run on assets its the secondary assets that take the hit

    There isn’t actually much prime UK commercial property outside London and the SE to be brutally honest

    When the Aberdeen property fund needed to raise liquidity to meet redemptions they sold prime London property

  • 5 William III September 22, 2016, 1:26 pm

    Would this effectively amount to a bet on whether the UK stays in the single market?

  • 6 Ric September 22, 2016, 2:37 pm

    I’ve missed the active investing posts, thanks for bringing them back!

  • 7 FIRE v London September 22, 2016, 2:52 pm

    TI – Great post thank you. I’ve been missing your active investing posts, and think you generally get the ‘do what I say, not what I do’ posture exactly right. Some of your older active posts were extremely helpful for me so, @newer-readers, this chap is well worth listening to.

    I too think UK property is generally an OK place to be. Things that help property prices: low interest rates (tick!), falling GBP (tick!), no change in planning regulations (tick, so far at least), population growth (tick, even without EU migration), geopolitical instability (neutral). Things that hurt property prices: outright recession (looking less and less likely), better returns elsewhere (not obvious with all the ‘have you seen equity valuations’ talk around), clamour for liquidity (not obvious either, though watch the Italian banking sector doesn’t cause contagion), increases in property taxes (not obvious, in fact the rumourmill keeps contemplating reductions in buyers’ stamp duty). On balance this looks positive for UK property. Most of the above factors apply more strongly to London than elsewhere in the UK thus if you want to go Long UK property, go even Longer London.

    I did some ‘plunging’ (not short selling, @Ermine, but rather diving deep to catch something that has fallen!) into Persimmon in the week after the referendum and three months’ hindsight is a wonderful thing.

  • 8 Bellabeck September 22, 2016, 3:36 pm

    I have Tritax and TR Property in my portfolio, and don’t see any reason to sell at present. I do also have international property tracker so not overweight in UK property

  • 9 Opposite September 22, 2016, 5:01 pm

    Can’t speak much for London, but as for the rest of the UK I am seeing light-industrial property at bargain basement prices. We are talking valuations at half their replacement cost (Tobin’s Q circa 0.5) along with 10%+ yields and high occupancy. Basically, the effect this has is to dampen speculative activity and curtail supply. Only one result: higher rents. Moreover it is one of the few sectors where valuations have never surpassed previous highs. Some sectors are in structural decline, but storage, manufacturing and distribution will be around for some time.

    Post Brexit I was buying Daejan, Mucklow and Hansteen, along with direct Light-industrial.

    Good luck.

  • 10 ermine September 22, 2016, 10:12 pm

    @FvL I did some of that sort of ‘plunging’ too but Jessie L it ain’t 😉

    I’m chilled on buying beaten up stuff. Selling good stuff expecting it to be beaten up, now that’s a whole different ballgame!

  • 11 hosimpson September 22, 2016, 10:13 pm

    Cheap isn’t always good value, but sometimes it is 😉

  • 12 SurreyBoy September 22, 2016, 11:18 pm

    This type of article is really useful to me. The commentary on NAV, exchange rate predictions, appetite of foreign buyers etc reminds me that there are investors that really get into the details (active investors) and passive people like me that just say “I will have 5% of my portfolio in REITs and roll the dice over 20 years”. Keep the articles coming please.

  • 13 The Investor September 23, 2016, 9:53 am

    @Neverland — If you want to buy REITs at 70% discounts to NAV, then you’ll get about one chance a decade and you’ll be able to hold for about a month. Fair enough if that’s your strategy — I won’t live that long! 🙂 I still share your overall pessimism (but not depth of pessimism) about Brexit. However I am an extremely pragmatic investor these days. I was wrong about the immediate impact of Brexit, and as for the pound declining to parity or whatnot, well it could happen if all goes pear-shaped but at the least the market has had three months to work out the odds so without such a dramatic decline I doubt we’ll see it. In general I try not to invest on the thesis of “if this bad thing THEN this bad thing THEN this bad thing THEN buy!” In my experience and observation, it seldom works. As you may recall, I tend to feel optimism rewards the investor. Brexit was an anomaly for me, probably because I am so averse to various non-investing aspects of it that we’ve much discussed.

    @ermine — Yes, meant plunging in the Livermore sense (which was why I linked to him). I tend to do this in US growth stocks during mini-panics. It has worked so well for the past five years that I’ve occasionally wondered why I don’t make it a core strategy but the answer is of course that for 5-10 years “buy the dip” has worked as the US market has marched remorselessly higher. At some point it won’t, which will then smash momentum strategies (which is effectively what it is, with a bit of contrarian mean reversion informing the buy signal).

    @Mark — All fair comment, but I think it’d have been more relevant back in early July, as plenty of that stuff has now re-rated (as you no doubt are aware). Personally I am not interested particularly in buying commercial property and then looking for the best bet. I am interested in cheap commercial property (the biggest REITs) and then wondering whether it’s legitimately cheap. 🙂 It’s the discount to book value (particularly as it is far from uniform, and the two big REITs look strong, balance-sheet wise) that has caught my interest.

    @William III — Definitely Brexit will loom large. I wouldn’t say it amounts to a binary bet though. Especially as the 0.7x price-to-book is already presuming something bad is going to happen. It’s really a question of *how* bad.

    @Ric — Cheers Ric! (And Ermine on same score. 🙂 )

    @FvL — Cheers for the kind words, and further thoughts. Interesting, we both bought PSN following the vote (though with my pessimism I didn’t do so immediately — I was selling what I could for the first fortnight). I only managed to hold it for about a 10% gain though. Bah, Brexit! 😉

    @Bellabeck @Opposite — Yes, we’d need a big shock to really upset the case for commercial property, which the market (and I for a period) clearly believed the vote to Brexit was about to deliver. Stagflation wouldn’t be great, mind. That’s a tail risk, but it’s not evenly reflected across the REITs.

    @hosimpson — Oh, happy days. Loved that investment. Was interested reading back and seeing my own logic, too, after eight years. If only we knew then what we know now. As always!

    @Surreyboy — Very interesting angle, cheers! If we can so reconcile active and passive on this blog, then who knows what’s next. Sony PlayStation vs Xbox? Cream first or after jam on a scone? World peace? 😉

  • 14 The Investor September 23, 2016, 9:59 am

    p.s. I forgot to mention that I am still by far more exposed to overseas assets than domestic, when it comes to my equity exposure. (Either directly or via proxies such as emerging market fund managers etc). As I said, I am “nibbling” at these. So about 3% across a small few. My portfolio consists of lots of these little idiosyncratic bets. If you’re going to be active, I believe, you have to really be active (i.e. different).

  • 15 zxspectrum48k September 23, 2016, 10:34 am

    Interesting question. I’m no expert on commercial property but agree that global location, favourable demographics, lack of alternative “carry” assets etc, generally add up to London being a reasonable investment proposition.

    I’m currently very cautious, however. On the office demand side, the private equity and hedge fund world is struggling. Many people expect hedge/private equity fund AUM to drop 20-30% over the next 18 months, with many closures, substantial downsizing and reduced compensation/fees. The back-office and middle-office functions are being taken outside of London at an ever increasing rate, further reducing demand. I’m not saying that financial services is key for demand in London. There is always demand for London but the price at which that demand exits could weaken. For example the FinTech companies now residing near Liverpool Street didn’t pay the same rents as the banks they’ve replaced. I also think a hard Brexit that caused firms to lose their passporting rights would be a big negative.

    Anecdotally (so treat with care) as a partner in finance firm (think 2&20) our office straddles the Belgravia/Mayfair area. We recently achieved a substantial discount on our rent vs. what we paid 3 years ago. The landlord (a big name mentioned in the piece) had a very weak hand. There is loads of unoccupied offices in nearby areas at cheaper rents. We also now have an much bigger office in SE England (rent/sq ft is 20% of Belgravia) so we could have easily moved to a smaller London office. Third, we knew the landlord had finally been told by the council that their multiple attempts to get PP to turn the building in”luxury flats” wasn’t ever going to happen. There seems to be some pushback by councils against commercial in Z1 being be converted to residential property.

  • 16 magneto September 23, 2016, 10:39 am

    Like others, really enjoyed reading this article.
    While essentially a ‘trackist’, am very open to all new ideas and possibiities.

    Conscious of Stock Valuations, it is difficult to find any seriously unloved areas of the market at this moment in time, but this might be one?
    In fact we have been forced Stock sellers for some months now as markets and valuations pushed back up and the ‘master spreadsheet’ insisted on Stock sales.
    Not that valuations overall are extreme.
    Quite the contrary!
    Just not below medians or at bargain levels.

    Segro appeals as a past investment whose business model vaguely understood, but a sub-market yield, and a quick look at the price history cooled any ardour.
    British Land, another past holding, on the other hand is offering quite a reasonable yield, but less keen on the business model in today’s climate, but perhaps worth keeping in mind as a long-term good choice?

    Was reading about ‘Regional REIT’ the other day. Yield 7.5%.
    Know absolutely zero about this company, but that yield did spark interest!
    Floated only last November so perhaps caution is justified.
    Should we at any point switch back into Stock buying mode, might investigate that one further.

    Do please keep these active articles and discussions going.


  • 17 Neverland September 23, 2016, 1:27 pm


    This might interest you; a survey of prime global office space costs in 2013 from Cushman & Wakefield (at that time £/Euro was about 1.17 average for year)


    Page 4 contains a table comparing West End prime office space with other leading global business centres

    London (West End prime): Euro 2,100 per sqm per year
    New York (Manhattan): Euro 993 on same basis
    Paris: Euro 895 as above
    Geneva: Euro 730 as above
    Munich and Milan: Euro 550 as above

    Costs include other things like business rates etc.

    We also have way more retail space per person than any other country except the USA too…

  • 18 FIRE v London September 23, 2016, 4:43 pm

    @zxspectrum48k – Re Fintech rents vs banks rents – Shoreditch rents (£65) are now very close to City rents (£70). Many old school City tenants not paying at current levels ; e.g. UBS is paying <£60 in Broadgate.

  • 19 Mattman September 24, 2016, 9:32 am

    Hi Monevator

    Loved the article – more active stuff please.

    I added F&C commercial property (FCPT) immediately after brexit – and very nice too.
    (Also City Merchants High Yield – a bond investment trust. That worked as well.)

    I am now in early retirement and I am trying to put 10% of my assets in the REIT space for long term income. My property portfolio is

    FCPT – I think this a cracking low geared, well run outfit. Not a lot in prime London.
    British Land (BLND) – paying 4.8% last time I looked.
    Hansteen (HSTN). Light industrial property – most in Europe. The board give themselves a lot of bonus incentives.
    New River Retail (NRR) – just bought. Low end shopping a la poundland/B&M/Farm Foods. The investors chronicle love them to bits.

    So hopefully a diversified bunch.

    This is about 9% of my portfolio.

    My gut feeling is to keep adding but not to prime London (BLND). Falling rents there may reduce my income – which as a long term hold income person, I am after.

  • 20 The Investor September 24, 2016, 9:44 am

    Apparently Moody’s will come out with a report next week predicting commercial property prices will fall 10% over the next two years: https://www.theguardian.com/money/2016/sep/24/property-funds-back-brexit-vote-closures

    Not ideal, but if that is the worst it is going to get then the biggest REITs still look a decent bet to me.

    (Thank for the further comments — busy finalising Weekend Reading at the moment! 🙂 )

  • 21 FatButFun September 24, 2016, 2:08 pm

    Am an ex Fund Manager of a Commercial Property Fund. Certainly when I looked at it F&C CPT had a fair exposure to London & South East. Another alternative would be UKCPT, which has a greater regional & industrial bias.

    I sold out of SLI Ignis UK Property in early May, which was more luck than smarts and want to get back into the market. I think the London exposure to foreign investors a worry so will choose my new vehicle with that in mind.

  • 22 Tim September 24, 2016, 5:05 pm

    Hmmm I sunk some money into FCPT post-brexit and do remember thinking it was rather overexposed to London and the south east: the latest Q2’16 factsheet claims “35.7% London – West End” and “26.2% South East”. However I also made an investment in Kames Property Income (yes, it’s a fund, which lots of people will hate for property) which is just 8.83% in London and 5.45% South East, and much more biased to the north. (Both investments are notable for paying income monthly, unusually).

  • 23 magneto September 26, 2016, 11:59 am

    After some digging and reading, think Regional REIT (RGL) is worth considering, as a potential buy for yield seekers, struggling with today’s Bond yields.

    Aha!, I hear you say, “Real Estate is not Bonds”.
    But then neither is RE pure Stock exposure?
    Kind of hybrid perhaps, with limited diversification benefits?
    TA includes in the S&S as part of Stocks, but added presumably for diversification.

    Forgive being slightly off-topic (which was LONDON Commercial Property).

    Counter-views would be helpful to form a balanced opinion.

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