British Land, Landsec and Great Portland estates were all hit with downgrades as the investment bank said expectations for a rebound in the sector as the economy recovered was “problematic”
The rise in home working during the COVID-19 pandemic represents a “medium-term headwind to sentiment and growth” for London-listed office landlords, according to analysts at , who cut ratings for multiple firms as they reassessed their outlook for the sector.
In a note on Tuesday, the investment bank downgraded Co PLC () to ‘underweight’ from ‘equal weight’, Group PLC () to underweight from equal weight, and PLC () to equal weight from overweight.
The bank said that while a cyclical recovery from an economic trough is usually “good for offices” given the sector’s reliance on employment growth and corporate confidence, values and rents “have yet to fall and vacancy is rising” which made the expectation of a sustained rebound in values “problematic”.
“While a credit crunch drove all capital values downward in the last crisis, this time, working from home has been at the epicentre of this crisis, and new ways of working will act as a demand headwind as tenants gradually adjust to a new post-vaccine normal. Higher growth economies should see better relative performance; but we still think market rental value trajectory will be sideways at best, and that in weaker locations where supply is looser, rents will fall”, Morgan Stanley said.
As a result, analysts said they now expected net asset values 9NAV) in the sector to be “flattish”, which will n turn drive “a sustained wide NAV discount, with risk to the downside if capital values start to crack”.
In terms of target prices, the bank raised British Land to 410p from 380p and Landsec to 650p from 610p despite the downgrades, while Great Portland was lowered t 650p from 660p.
The one major London-listed office landlord to escape a downgrade was PLC (), which was retained at ‘overweight’ with a 3,200p target price as Morgan Stanley said the firm was their “preferred office name” in the UK.
Shares in British Land were down 0.7% at 472.3p in mid-morning trading, while Landsec rose 1.4% to 674.2p, Great Portland climbed 1% to 668.2p and Derwent jumped 1.4% to 3,130p.
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