Newspaper article The Journal (Newcastle, England)

Caution Urged in Real Estate Sector

Newspaper article The Journal (Newcastle, England)

Caution Urged in Real Estate Sector

Article excerpt

Byline: ANDREW MILLER

ONE of the main victims of the global economic maelstrom has been the real estate sector, and the severity of the downturn has been reflected in the dire share price performance of the quoted commercial real estate companies.

However, given a number of recent developments - namely high real estate investment trust yields, rights issues to rebuild battered balance sheets and slowing declines in the net asset value (NAV) of property companies - now might seem a good time to invest in real estate.

Indeed, our global macroeconomic view indicates that the worst is over for commercial real estate in the sense that the asset class as a whole is now closer to its "fair value".

However, looking at the quoted UK commercial real estate stocks that we analyse, we think it still too early to be positive, so retain a neutral view.

Property companies'' leverage, as measured by loan-to-value (LTV) ratios, remains high in the UK relative to Europe, and we think credit availability and refinancing could remain problematic.

Given this leverage, the sector remains sensitive to any further shocks to the economy - and it is very clear that it will take the UK economy some time to heal fully.

In addition to short-term macro worries, the London bias of the two major UK commercial real estate players - British Land and Land Securities - also presents an unattractive concentration of risk in our view.

On the plus side, we do see potential for active property portfolio management by property companies, and in particular the acquisition of distressed property assets at good prices.

British Land stands out as a strong player in this regard. Although fairly highly levered, the group has significant untapped loan facilities and a strong track record in trading its assets.

That said, with most companies trading close to NAVs and our expectation of further write-downs, we find valuations unappealing given the risks involved. …

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