CS Real Estate has issued a new note on the property sector saying yields could compress beyond expectations in the short-term, meaning potential upside for real estate share prices.
"The weight of equity that is pushing into a supply constrained UK commercial property market is likely to have sent values up by 10% already and demand from equity appears to be spilling over from prime into the next tiers of quality," the broker said.
■ The reasons for the yield compression could also see it reverse
In our view yields are compressing due to low bond yields, low interest rates on cash, a weak sterling all working in a market where demand for property is outstripping bank constrained supply. This yield compression is occurring as rents have fallen significantly in London offices (remaining weak) and where rents in retail appear set to remain challenged, probably with further to decline in most markets. With this in mind we remain concerned that this yield compression without occupier support could stop and reverse just as quickly as it appeared but looks set to continue well into the New Year prompting our NAV revisions.
■ Share prices are anticipating upward property revaluations
The UK large cap REIT's are pricing portfolio value increases of 9% for Land Securities (c60bp yld compression), 10% for British Land (c70bp yld compression), 16% for Derwent London (c100bp yld compression) but only 5% for Hammerson (c30bp compression) and 1% for Liberty International where we argue the latter two portfolios are more aggressively valued. The share prices are implying portfolio value increases in the face of weak occupier markets and growth potential beyond that already priced in appears limited.
■ Updating estimates
We have reviewed our estimates for Land Securities, British Land, Hammerson and Liberty International resulting higher NAV estimates reflecting expected year end portfolio value increases. Beyond the current year end we anticipate a small reversal of values as yield compression abates, rents stabilise and slow growth resumes. This muted growth implies downside to our price targets of 15% for Land Securities, 10% for British Land, 13% for Hammerson and 12% for Liberty International. Yields compressing beyond expectation is a clear upside risk to our price targets.