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Troubling times for London landlords as office vacancies hit 30-year high

Published 27/09/2023, 12:00
Troubling times for London landlords as office vacancies hit 30-year high
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Proactive Investors - London’s foremost commercial landlords have seen their share prices slashed today following worrying research published by analysts at Jefferies.

Warning of a “rental recession”, Jefferies downgraded the likes of British Land Company PLC (LON:BLND), Land Securities Group PLC (LON:LAND), Great Portland Estates and Derwent London PLC (LON:DLN), while estimating a 20% decline in London office usage.

Jefferies laid the blame predominantly on the post-pandemic shift to hybrid working, while noting significantly higher funding costs in the era of high interest rates.

“Utilisation has shrunk and landlords are losing pricing power as tenants offload surplus space. London vacancies are at a 30-year high and above the tipping point at which rents fall,” said Jefferies.

There was, however, one exception for “green-ium rented towers”.

According to analysts, “London REITs appear cheap but are probably not good value”, therefore affecting downgrades and reduced price targets on all major landlords.

British Land’s target share price was reduced by 40% to 250p, LandSec by 27% to 465p, Derwent by 44% to 1,913p and Great Portland Estate by as much as 59%.

Against current spot prices, these targets represent an average discount in the vicinity of 40%.

Jefferies predicted that both LandSec and British Land would need to conduct rights issues “to buy cheap assets on any scale to average down”.

Morgan Stanley remains bullish

Where Jefferies sees UK REITs as cheap but not good value, Morgan Stanley (NYSE:MS) sees a buying opportunity.

They remain in favour among analysts at the bank, which labelled them a “compelling opportunity” in research posted this week.

It follows bullish comments on the sector from Morgan Stanley and brokerage firm Liberum earlier this month.

“Recent inflation misses and the Bank of England pausing have been drawing investor attention to these stocks,” Morgan Stanley said in its latest note.

According to Morgan Stanley analysts: “UK balance sheets screen as sufficiently capitalised in the context of asset appraisals, while net asset valuation for many is close to or at all-time lows.

“We are alive to the fact that broader UK exposure and offices as a sub-sector are out of favour, but at current valuation the risk-reward is compelling in our view.”

Read more on Proactive Investors UK

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