Investors should not rely on expected rental growth to boost the “hungover” UK-listed property sector, according to a new Citigroup research note.
The bank warned the industry to “fasten its seat belts” ahead of a bumpy ride. It said that volatile trading was expected to continue in the short term, and that hedge funds were actively “shorting” the sector.
Citigroup believes that sentiment is firmly against property shares, and that many funds are now “underweight” or out of the sector entirely.
However, it does not believe that rising interest rates are likely to have a significant effect on the sector as property shares have performed well during most of the previous rounds of UK rate hikes.
With the exception of the late 1980s, when interest rates rose by 550 basis points, none of the later rate hikes had a negative effect on the sector.
“This suggests there is no mechanical relationship between commercial property and high rates,” said analyst Philippe Le Trung.
But the bad news, according to the report, is that rental growth, the main contributor to analysts’ NAV growth forecasts, is unlikely to boost the sector’s flagging share prices.
“Historically, rental growth has not been a driver for share price performance,” said Le Trung. “We see little relationship between rental growth and sector performance.”
In the UK, Citigroup believes that Land Securities and Safestore stand out as having solid earnings growth and a decent earnings yield.
It also believes the sector would be foolish to rule out a bid for Hammerson, although it said there were few reasons to buy in the UK market right now, which appears to be peaking.
Citigroup said the most recent company reports suggested values were at their peak, and that above-inflation rental growth was limited to central London offices.
“The poor share price performance is a reflection of a slowing underlying real estate market where yields have broadly stopped falling. At a sub-sector level, there are signs of them rising, particularly in secondary properties.”
Citigroup also downgraded target prices on eight European property stocks, saying they now looked over-priced.
