UK property market could be about crack. Here’s how to trade the sector, analyst says
The UK property market was thrown into turmoil after political unrest caused borrowing costs in the country to soar. Earlier this month, expansionary tax cuts announced by UK Treasury Secretary Kwasi Kwarteng pushed UK government bond rates to their highest levels in over a decade. This made UK property stocks less attractive to investors, who turned to government bonds as a better – and safer – bet. As a result, investment research group Stifel Europe issued “significant” downgrades across the sector. Here are the five stocks whose price targets have been cut the most by Stifel, along with their ratings: In a Sept. 30 report titled “In Liz we’re Trussed,” analysts said interest rates were being driven by government policies key factor in their outlook on the real estate sector. “The game of generating growth through lower taxes has sent shockwaves through financial markets, causing the 10-year gilt yield to rise by over 100 basis points in two weeks and 230 basis points in two months,” they said. The report found that real estate companies’ share prices have not yet taken into account the impact of rising interest rates due to a lag between property valuations and the disclosure of those valuations. Meanwhile, Stifel believes corporate bond yields, assessed in real-time, are good indicators of future pressures on real estate assets. One of the industry leaders, SEGRO, has seen the interest rate on its bonds rise to 6.4% from 1.2% just over a year ago. Hammerson, the owner of several malls, has also seen its bond yields jump to 10.7% from 2.6% last year. Property investment firm Shaftesbury The West End saw the biggest percentage cut from Stifel Europe’s price target. The analysts said that while the company could benefit from a weaker sterling, it will not be immune to rising interest rates. The company’s shares are already down 42% this year and are now trading 3.5% below Stifel’s price target. British Land Stifel said his previously positive outlook for the FTSE 100 company had reversed due to significantly deteriorating macroeconomic conditions, which led to a rating downgrade. Analysts expect London’s office property sector, in which British Land has made significant investments, to fall in value this year and into 2023. Stifel’s message to clients says British Land is unlikely to be upgraded in the short term until there is more clarity on the movement in property values. As a result, the company’s shares are down 35% this year. Great Portland Estates Despite cutting the target price by 65%, the FTSE 250 stock still has a Buy rating from Stifel. According to Stifel, the company’s shares are expected to rise 10% by the end of the year. The research note said that while Great Portland Estates will also face headwinds from rising interest rates, its “conservatively funded” balance sheet will allow it to emerge stronger than its peers. The company reported a loan-to-value of just 24% in its most recent filing, which Stifel says will give the company plenty of room to expand if house prices fall. “Shares are likely to be volatile in the near term, but at current valuations, we believe the shares represent a deep value opportunity for investors willing to take a bumpy ride,” they said. “Radical change in political leadership” John Cahill, lead analyst on the Stifel note, welcomed the UK government’s U-turn on its plans to cut the top rate of tax but said he still sees its big spending plans as inadequate in the current environment. “Unless there is a radical change in UK political leadership and a reversal in fiscal policy, this may not be our last downgrade,” he said in the statement. “It is not impossible to imagine the Prime Minister firing the Chancellor to save her position and electoral suicide for the Conservative Party.”