UK real estate firms face a “precarious” situation in the near to-medium term as net asset values fall and refinancing risks loom, according to analysts at HSBC, who downgraded 11 firms in the sector.
(Bloomberg) — UK real estate firms face a “precarious” situation in the near to-medium term as net asset values fall and refinancing risks loom, according to analysts at HSBC, who downgraded 11 firms in the sector.
Analysts led by Stephen Bramley-Jackson cut all UK real estate stocks they cover to either hold or reduce, leaving no buy ratings in the sector. Commercial property company British Land Co. and real estate investment trust Land Securities Group Plc were double downgraded to reduce from buy, while shopping center operator Hammerson Plc was cut to the sell-equivalent rating from hold.
“The near to medium-term looks particularly precarious,” Bramley-Jackson wrote in a note Monday. “Real estate equity is factoring in a further 20%+ fall in asset prices and looming refinancing risk is a major concern.”
The HSBC analysts said that a recession in the UK is looking more likely, with last month’s higher-than-expected inflation data expected to spur the Bank of England to keep interest rates higher for longer. Recession will further hit real estate values and rental growth, while many companies — especially those in office and retail real estate — have a significant amount of refinancing risk.
The sector has struggled this year, with a FTSE index tracking real estate investment trusts down almost 12% as the cost of borrowing has surged — ending more than a decade of cheap money that inflated asset values. Commercial real estate firms have also been grappling with the shift toward hybrid working models since the coronavirus pandemic, spurring some tenants to give up leases for larger office spaces in areas like London’s Canary Wharf.
In May, British Land, whose City of London tenants include UBS Group AG and TP ICAP Group Plc, marked down the value of its portfolio by 12%. The landlord was also demoted from the bluechip FTSE 100 index. LandSec, meanwhile, marked down the value of its portfolio by 7.7% in the year through March.
HSBC echoed comments from Goldman Sachs Group Inc. analysts, who said last month that the London office market is deteriorating and is likely to get worse. They cut West End office and retail property firm Great Portland Estates Plc.
–With assistance from Michael Msika, Sam Unsted and Charlotte Hughes-Morgan.
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