Proactive Investors - Goldman Sachs (NYSE:GS) has shifted its stance on key players in the UK real estate market, upgrading Land Securities Group PLC (LON:LAND) to 'buy' and British Land Company PLC (LON:BLND) to 'neutral'.
This strategic repositioning is primarily driven by the firms' significant retail exposure, which is anticipated to benefit from recovering in-place rents and a comparatively lower cost of capital against other asset classes.
The investment bank's latest sector review also brings forward revised estimates and price targets for 2024, underscoring an 8% average increase in 12-month price targets across the sector.
This adjustment is attributed to a 16 basis points reduction in the weighted average cost of capital (WACC), signalling a nuanced yet optimistic outlook for the property sector.
The 2023-2025 net tangible assets (NTA) estimates have been moderately adjusted, with a decrease ranging from 0% to 5%. This revision takes into account the expected yield expansion in the latter half of 2024, indicating a period of adjustment and potential volatility in property values.
In terms of earnings stability, Goldman Sachs reports that the 2023-2025 earnings per share (EPS) estimates for the sector remain largely unchanged. This suggests a level of resilience in the sector's earnings potential, despite the broader economic challenges and market shifts.
The report also highlights the broader economic context, noting that Goldman Sachs economists forecast a stronger real GDP growth environment than the consensus for both the EU and the UK.
With inflation expected to fall faster than previously anticipated, the investment bank sees potential rate cuts from the second quarter of 2024. This macroeconomic outlook is poised to benefit landlords, maintaining resilient operating trends despite the challenges posed by higher interest rates.
However, the impact of potential rate cuts could vary. Should rates be cut more rapidly or deeper than currently expected, and if 10-year yields stay below Goldman Sachs strategists' expectations (Germany at 2.25%, UK at 4.0% by the end of 2024), the real estate sector could see a significant positive impact on its performance.
The analysis also touches upon the need for lower property values to stimulate recovery in investment volumes, especially in a landscape of persistently elevated interest rates.
Goldman Sachs adds a cautionary note, predicting a 7% further decline in property values, particularly in office spaces, which is an increase from the previously estimated 5%.
In terms of stock ratings, Goldman Sachs has provided a comprehensive overview, categorizing various companies into 'buy' and 'sell' ratings across different sub-sectors such as value/retail, logistics/self-storage, and offices.
This includes specific mentions of companies like Covivio SA (LON:0J6V) (COV), Unibail-Rodamco-Westfield SE (LON:0YO9) (URW), and Big Yellow Group PLC (LON:BYG), among others, reflecting a detailed and sector-specific approach to investment analysis.
In early afternoon trade, Land Securities shares were flat and British Land's were up 1.8%.