Real estate investment trusts ‘priced for GFC II’

One of the best-known equity analysts covering listed real estate has said UK real estate investment trusts now appear to be “being priced for Global Financial Crisis II”. A downbeat note from Jefferies’ Mike Prew this morning included a raft of downgrades to his REIT price targets. The moves will add to a growing sense of unease about the outlook for the real estate markets as macroeconomic conditions bite and the investment market looks set to slow markedly. Although Prew said “beds, sheds and meds” should remain in favour, he noted that retail rents are now likely to fall below “sustainable” levels to cover rate bills and described high-maintenance capex office buildings as “melting icebergs of value”, adding that “the browner they are, the quicker they melt”. Prew said Landsec and British Land now have market capitalisations that are 16% and 8% lower than a decade ago, respectively. He downgraded Landsec’s price target to 672p from 690p and British Land’s to 459p from 485p, pegging both as “hold”. “Private equity capital and corporate buybacks might soon start to establish a floor in deeply discounted REITs,” he added.  Landsec and British Land were among the sharpest falling stocks in the FTSE 100 over the day, ending the session down by 1.87% and 1.79% respectively against an index rise of 0.18%. That took their stock prices to 662.4p and 454.5p. British Land and Landsec declined to comment on Prew’s note. The outlook for offices continues to cloud prospects for many REITs, Prew said. “It’s not the office but the commuting schlep which is capping peak reoccupation at 50%, which still remains well below pre-Covid levels across the week,” he said. “Covid infection rates are rising and UBS is now subletting London HQ space in a seeming acceptance of hybrid working. Otherwise, it appears blue-collar workers in the suburbs are retiring early and exiting the labour pool and younger workers are upskilling from McJobs. It seems office occupancy has peaked, and tenants might start to chip rents down.” And signs of a freeze in the investment market add yet more woes to the market. “London offices for sale at aspirational prices are now being pulled,” Prew wrote. “We don’t know if there will be a recession, and the economy is on the same level as pre-Covid but not on the same trajectory. After the indiscriminate buying of the QE years, the risk premium of secondary over prime buildings is now not only narrower than 2007 which was followed by the REITs’ ‘beggars’ banquet’ of rights issues, it has now evaporated.” Big names that would once have rushed to pick up assets are sitting back and waiting. “The mega US asset ‘hoovers’ such as Blackstone, Brookfield and Realty Income have seen their cost of capital spike up, and these price makers are on the sidelines,” Prew wrote. “Oil-based [sovereign wealth funds], however, can now buy prime West End offices at the equivalent of 30 [barrels] per square foot from 100 two years ago.” In a separate note, RBC Europe analyst Julian Livingston-Booth downgraded five UK and European stocks to “underperform”: British Land, Hammerson, Unibail, Warehouse REIT and Warehouses De Pauw. He said the team was revising forecasts to reflect “a recession scenario, leading to higher vacancy, weaker market rent trends and lower variable returns”.  On British Land, Livingston-Booth said: “Our more cautious view of London office and UK retail property markets negatively impacts our forecasts for British Land. Furthermore, we believe a more negative macro scenario appears slightly at odds with management’s view of their markets… While we believe in more demanding tenants leading to wide-ranging trends within certain property markets, our view is it is unlikely to be supportive of attractive development returns near-term and only benefits a proportion of most REITs’ existing portfolios.” To send feedback, e-mail tim.burke@eg.co.uk or tweet @_tim_burke or @EGPropertyNews Image © Oleg Gamulinskiy/Pixabay