- Jefferies cuts stocks to ‘hold’ or ‘sell’
- Analysts see ‘recession’ in offices
- Morgan Stanley takes a more positive view
Shares in four of the UK’s biggest property companies fell after analysts at investment bank Jefferies cut their recommendations on the basis office rents in the capital are headed for recession.
British Land (BLND) shares eased 1.9% to 320p, Derwent London (DLN) shares were 1.6% lower at £18.79, Great Portland (GPE) 3.5% lower at 417p and Land Securities (LAND) 2.2% lower at 592p.
NEGATIVE VIEW ON RENTS AND OCCUPANCY
Analysts Mike Prew and Sarim Chaudhry downgraded their recommendation on all four stocks saying offices are the next casualty of lower rents and occupation after the fall-out in the retail sector.
‘Utilisation has shrunk and landlords are losing pricing power as tenants offload surplus space. Vacancies are at a 30-year high with the West End 7%, City 10% and Canary Wharf we estimate over 20% with the tipping point for a rental recession historically around 8%,’ they argue.
‘We estimate a 20% contraction in London office utilisation on WfH (working from home) and hybrid working with reoccupation focused on core green HQ buildings and SMEs (small and medium enterprises) in the suburbs.
‘Flex, co-working (e.g. WeWork) and serviced offices operate around 9% of London space and have absorbed vacancies and extended this rent cycle. Now the hotel economics of short income/long liabilities mismatch appear to leave landlords with scant recourse.’
The analysts are more positive on ‘Beds, Meds and Sheds’, which they argue are set to enjoy structural growth with low operating costs meaning more rental income will convert into earnings.
They highlight Empiric Student Property (ESP), Grainger (GRI), PRS REIT (PRSR) and Unite Group (UTG) in the accommodation sector, and LondonMetric Property (LMP), Segro (SGRO) and Tritax Big Box (BBOX) in the logistics and industrial sectors.
OTHER ANALYSTS ARE MORE POSITIVE
In contrast, analysts at Morgan Stanley argue UK property companies ‘offer a compelling opportunity’ as their balance sheets are well capitalised in the context of asset appraisals and NAV (net asset value) valuations are at or close to all-time lows.
Property stocks tend to start doing well towards the end of an economic slowdown, and the analysts believe the trough in real UK GDP ‘could be closer than some assume’.
At the same time, the decline in NAVs ‘is behind us for most sectors’ such as accommodation, logistics, retail, residential and self-storage, and possibly also in the case of offices.
Another potential catalyst for a re-rating is the extreme underweight position in property stocks held by institutional investors, meaning once they start to recover there could be a scramble to buy shares.
