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Property blue chips upgraded as Deutsche Bank predicts property selling spree

Published: 10:26 22 Jan 2021 GMT

British Land - Meadowhall
Could British Land's Meadowhall shopping centre be up for sale?

British Land Company PLC (LON:BLND) and Land Securities Group PLC (LON:LAND) have been upgraded along with several other property developers across Europe as Deutsche Bank took a more optimistic stance on the sector as it looked “beyond vaccines”.

Although acknowledging the coronavirus jabs “are no guarantee of a silver bullet” and it is still expected to be a challenging year for the sector, analysts at the bank upgrade the FTSE 100-listed pair to ‘buy’ from ‘hold’, with share price targets unchanged at 490p for British Land and 730p for LandSec.

READ: Property giants see hospitality and retail rent collections tumble

In a 2021 outlook note, after the analysts collected feedback from more than 30 C-level executives in the industry and several of contacts covering the European property market, Deutsche Bank provided a detailed overhaul of all its financial models and investment cases of the companies covered.

“While we do believe in a modest economic recovery this year, we do not think property companies can post ‘V’-shapes recoveries as they did after the [global financial crisis].”

On the other hand, as liquidity did not dry out in the past year, as it did during the financial crisis, the fretting by capital markets over loan-to-values and near-term vacancy levels is leading to some shares offering wide discounts to net asset value (NAV) which “could spur M&A this year”, with the bulging coffers of private equity firms making them a natural buyer in the coming year.

British Land and LandSec are both recommended for their managements proven ability to sell assets at a premium to NAV.

The former was trading at 35% discount to spot NAV and a 25% discount to forecast NAV for the 2022 financial year, but analysts “consider the market is already pricing in too much asset value downside”.

As for LandSec, the number crunchers believe the market “is assigning too high a discount to its non-office exposure”, with the stock trading at around a 40% discount to spot and 30% to 2022 forecast NAV.

With the OECD recently commenting that “lockdowns are here to stay, at least for another 6, 9, 12 months or longer“, and social distancing expected to “probably remain with us until 2023”, the analysts expect European offices to only recover very slowly.

A recovery in rents is therefore not predicted before 2023 for most markets, though Germany should be sooner, as tenants are likely to postpone big office moves and initially extend current contracts at current rents.

“We recommend investing in markets with positive outlooks for office employment growth (short commutes), stocks with embedded rental upside and markets which entered the crisis with strong fundaments.”

This points to continental names CA Immobilien Anlagen AG, alstria office REIT-AG, Aroundtown SA and Icade SA.

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