Shares in UK property companies slid this morning after Merrill Lynch lowered its rating on a raft of stocks.
Companies affected by the downgrading included Hammerson, Grantchester, Rugby Group, Compco and St Modwen.
While ML forecasted that the property sector will be good value in 2002, with an average sector discount to net asset value (NAV) of 32%, it said there is a risk this discount will weaken and shares will underperform if the equity market continues to re-rate more cyclical sectors.
The broker rated the sector a ‘neutral’ in a 50-page morning note, on the basis that the equity market could be volatile.
ML was optimistic that the sector would enjoy an increase in corporate activity, with an increase in share buy-backs, restructurings, MBOs and bids if large discounts to NAVs persist.
But risks lie in London and Thames Valley offices, where Merrill expects the vacancy rate to rise from around 5% to 9% in the first quarter of 2003.
However, the broker thinks values should be supported to a great extent by the weight of private money. Retail markets should be defensive, although prime retail rents may not move ahead until 2003, it advised.
The broker retained its ‘buy’ stance on British Land, Canary Wharf, Liberty International and Slough Estates and remained ‘neutral’ on Land Securities. It also reiterated ‘buy’ on Brixton Estate, Derwent Valley, Green Property, Haslemere, Minerva and Saville Gordon Estates.
At 8.38 am, the FTSE 350 Real Estate sector index was trading down 0.39%.
EGi News 07/01/02
