The stock market has fired a warning shot over property shares after recent trading turmoil shook UK REITs to their lowest levels since conversion.
For the first time since REIT legislation was introduced on 1 January, the UK real estate sector has traded at an average discount to net asset value.
Reflecting wide concerns that property shares were trading at unfounded premiums, the index suffered a 7% fall last week, compared with the FTSE All-Share’s 4% fall. At its worst, the index traded at a 10% discount to NAV, before recovering to a 2% discount midweek.
Hardest hit were UK REITs, which fell almost 8% on average, with most losing any market gains racked up in the last quarter.
The weaker valuations support market speculation that REITs are now vulnerable to bid activity. That real estate groups with apparently solid fundamentals are subject to unrelated stock market forces has been a wake-up call for investors, and a likely stimulus for potential bidders.
“We are in different territory,” said Nan Rogers, real estate analyst at Arbuthnot. “One factor pushing shares up has been greater buying by overseas investors than before. But many UK investors think the sector has been looking vulnerable – they are not used to property companies trading at a premium. A shake-out is useful.”
Her sentiments were echoed by the head of real estate at a global investment bank, who wished to remain anonymous, who said: “There’s nothing wrong with the correction. It’s not a reflection on the underlying assets or the quality of management – but it’s more realistic over the medium term. Accepting 2-2.5% dividend yields on assets that are not growing in value is not sustainable. There is only likely to be more bid activity.”
Analysts at JP Morgan believe that certain stocks such as British Land, Liberty International and Land Securities now look “outright cheap”, but the risk/return profile is not attractive enough to buy “aggressively” into the sector.
They believe there is still not enough upside potential in real estate shares.
Land Securities
British Land
Hammerson
New 2007 low of 1988p
New 2007 low of 1451p
New 2007 low of 1485p
Source: Thomson Financial
Source: Thomson Financial
Source: Thomson Financial
