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Analysts at Morgan Stanley downgraded their view on several UK office stocks in response to expected increases in supply and the structural uncertainties that were still present.
The direction for the office subsector was clouded by a mix of cyclical and structural factors alongside a wide range of financial and operating leverage at the individual company level.
Key to their thesis, capital values had yet to fall – unlike during the previous crisis – making expectations of a sustained rebound in values “problematic” and vacancies were rising.
In a nutshell, many of the benefits of a cyclical recovery were already in the share price.
The trend towards working from home was also likely to prove a medium-term headwind to sentiment.
“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,” they said.
On the flip-side, a lower cost of capital was a plus and lower bond yields “are likely to positively impact all subsectors.”
“Our refreshed forecasts now assume a flattish NAV and capital value trajectory in most markets, but assume that this will drive a sustained wide NAV discount, with risk to the downside if capital values start to crack.”
Great Portland Estates was downgraded from ‘overweight’ to ‘equalweight’ while Land Securities and British Land were both taken down a notch, from ‘equalweight’ to ‘underweight’.
Morgan Stanley’s target price for the former was trimmed from 660.0p to 650.0p but those for Land Securities and British Land were both revised higher from, 610.0p to 380.0p to 650.0p and 410.0p, respectively.
In the UK however, the broker remained ‘overweight’ on Derwent London with an unchanged target price of 3,200.0p.
