UK real estate upgrades and three top picks in the sector
This City analyst is looking forward with ‘cautious optimism’ as real estate stocks move into a rate-cutting cycle at a trough in valuations and with balance sheets firmly intact.
2nd October 2024 15:26
by Graeme Evans from interactive investor
High-yielding British Land Co (LSE:BLND) and Land Securities Group (LSE:LAND) have been given the support of a City bank as risk-returns begin to shift in favour of the two heavyweights of UK real estate.
Deutsche Numis raised its stance from Hold to Buy, while it also backed urban logistics firm LondonMetric Property (LSE:LMP) to continue its premium-rated progress in the FTSE 100 index.
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Overall, the bank is looking forward with “cautious optimism” as the UK sector moves into a rate-cutting cycle with balance sheets firmly intact and recent half-year results likely to have signified the trough in values.
Analyst Max Nimmo added: “As rates come down and reasonably priced debt becomes more available, investment markets are slowly starting to re-open.
“However, this will take time and we expect the recovery to be more 'U' than 'V'-shaped. Occupier demand, across most sub-sectors, remains solid but only for the best space.”
The bank lifted its price target on British Land by 13% to 510p, which compares with this afternoon’s level of 441.2p and last autumn’s post-Covid low point below 300p.
The FTSE 250-listed company is focused on campuses, where it controls all aspects of the office, leisure and retail offer, as well as the sub-sectors of retail parks and urban logistics.
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Deutsche Numis expects adjusted earnings to fall by 2% in 2025, partly due to the loss of Meadowhall shopping centre income, before a rebound in the following years.
Nimmo said: “We expect the dividend will continue to grow despite the blip in earnings growth and will accelerate as the income from British Land’s sizeable development pipeline comes on stream.”
The company trades at a mid-20s percentage discount to net asset value and with a 5% dividend yield.
With risks dissipating, the bank has upgraded Land Securities by 4% to 760p. This compares with 646p earlier today and 559p in October 2023.
It regards a similar mid-20's discount to net asset value and 6% dividend yield as attractive, although it adds it may take an inflection in earnings for the stock to fully re-rate.
The company has reshaped its portfolio to focus on high quality London office developments, regionally dominant shopping centres and mixed-use urban regeneration schemes.
The key downside risks on both target prices include stickier inflation leading to slower rate cuts, a harder economic landing reducing occupier demand and planning delays.
The price target on LondonMetric is up by 10p to 230p, an upside from 205p on top of a 20% improvement for shares in the past year.
LondonMetric’s elevation to FTSE 100 status follows the acquisitions of LXi REIT and CT Property Trust, which doubled the size of its portfolio to £6 billion and resulted in an annual rent roll of £340 million.
The company, which was created in 2013 through a merger of London & Stamford Property and Metric Property Investments, is now the UK’s leading triple net lease REIT — where the tenant is responsible for paying key expenses as well as the base rent.
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Deutsche Numis believes the 6% dividend yielding LondonMetric “rightly deserves” its valuation premium versus peers due to its efficient 'roll up & recycle' strategy.
It added: “The test for LondonMetric will be to maintain its earnings growth trajectory, with further inorganic growth being the cherry on top.”
LondonMetric is one of the bank’s three top picks in the sector, with the others being UNITE Group (LSE:UTG) and Tritax Big Box Ord (LSE:BBOX).
It said: “Despite headline noise around university finances, we continue to favour Unite Group with higher student volumes increasing the pressure on beds against an ever tighter supply outlook.”
The bank has a target price of 1,180p on Unite and 190p for Tritax Big Box. Its other Buy recommendations include London-focused Great Portland Estates (LSE:GPE), Helical (LSE:HLCL), Workspace Group (LSE:WKP) and Shaftesbury Capital (LSE:SHC).
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