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UK property shares set for 20% rise: Morgan Stanley

But over longer run, rally could ebb as economic downturn forces rentals to fall


UK property shares may surge at least 20 per cent in the first half of 2008 as the Bank of England cuts interest rates, predicts Morgan Stanley.

On a longer two year view however, Morgan Stanley is concerned that a downturn in the British economy will force struggling businesses to vacate properties and cause rentals to decline. In that event the rally will peter out and property shares will decline again.

Indeed following Morgan Stanley’s forecast and Singapore GIC’s purchase of a 3 per cent stake in British Land, UK commercial property shares have begun to rally. British Land, Europe’s largest property company in terms of assets jumped by 15 per cent from recent 12 month lows to 943 pence.

Segro, the UK’s largest owner of office parks, has rallied by 30 per cent to 499 pence, Brixton plc, the country’s largest industrial landlord, by 25 per cent to 323 pence, Hamerson, another leading UK property share by 16 per cent to 1,054 pence and Liberty International, the UK’s largest shopping mall owner by 10 per cent to 1,005 pence.

Despite the rally, British Land is still 45 per cent below its early 2007 high of 1,711 pence, while the other UK property shares are currently trading between 26 per cent and 42 per cent below their 12 month peaks.

The vast majority of UK property analysts and real estate stock analysts are still bearish. According to IPD, the main index provider for commercial property, prices have fallen by nearly 10 per cent since their peak in the middle of last year.

Prices had soared in the preceding five years. Commercial property optimism has fallen to its lowest level since 1990. A recent ING Real Estate Investment Management Investment Survey 2007, conducted late 2007, revealed that only 8 per cent of the respondents were optimistic.

This represented a dramatic fall from the previous year’s figure of 64 per cent.

Real estate firm Jones Lang LaSalle estimated in December that deal volumes were down by 60 per cent in the fourth quarter. The gloom has worsened as poor retail sales and a downturn in Marks & Spencer results have accentuated fears of a UK recession.

In such conditions, however, bargains can be found. UK property shares have been dumped by investors and short term traders such as hedge funds – so much so that their share prices have fallen well below the underlying value of their property assets. In other words they are discounting a further price decline.

British Land’s share price, for example, is trading at an estimated discount of around 45 per cent to the balance sheet value of its net assets.

Anthony Bolton, a veteran and top performing London fund manager at £pounds;400 million Fidelity Special Values fund said that the fund had bought several established UK property stocks in recent months.

Mr Bolton took the view that the property share slump ‘discounts a big drop in property values, and in some areas it over-discounts that’.


Source: Business Times 22 Jan 08


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