The listed real estate sector has cause for a “renewed sense of optimism” this year, the research team at investment bank Peel Hunt has said.
The team, led by Mathew Saperia and James Carswell, have singled out seven companies as their “top stock” picks for the year ahead: Empiric Student Property, Primary Health Properties, Shaftesbury Capital, Helical, Warehouse REIT, Sirius Real Estate, and Lok’nStore.
Empiric is “very well placed” to take advantage of growth in the purpose-built student accommodation sector, they said, with a well-regarded operating platform and a discount of almost 30%. Primary Health has shown a “stellar growth track record”, the firm added, with a “super secure” income stream and an improving outlook for rental growth.
Shaftesbury Capital should be in investors’ sights due to it owning “arguably one of the best mixed-use portfolios in London”, while Helical is “a clear beneficiary of the market’s bifurcation” in terms of office space.
Warehouse REIT is the bank’s pick for backing an industrial market in which yields “appear to be stabilising”, and Sirius was praised for its “firepower” following an equity raise and as a “strong cash-generator”. Lok’nStore was singled out for the potential” significant increase” in earnings and net assets from its landmark stores.
The analysts noted that capital values fell by 5% last year, led by a drop in offices. “Without wanting to sound like a broken record, we expect overall asset values to trough this year,” they said.
The sector’s discount to NAV stands at 16%, the pair said. “Against previous cycles, this does not look out of kilter, and it is the repricing that comes as capital values begin their recovery that offers investors an attractive return profile,” they said, adding that historically, buying the sector at a 10-20% discount has delivered an average 12-month return of more than 11%.
The Peel Hunt team reiterated an earlier prediction that listed companies would increasingly look to raise fresh equity as the cost of debt grows, citing last year’s deals from Unite, Lok’nStore, Big Yellow, Sirius and Capital & Regional.
“Each raise was done on the ‘front foot’ in order to take advantage of acquisitions or development opportunities, and we understand they were all supported by investors,” they said. “We expect to see more equity raises in 2024, with new equity looking more attractively priced than debt on a risk-adjusted basis… For a typical REIT seeing attractive opportunities to improve its portfolio, we believe equity looks the most attractive source of capital at present.”
To send feedback, e-mail tim.burke@eg.co.uk or tweet @_tim_burke or @EGPropertyNews
