Deutsche Bank re-evaluates real estate sector

Deutsche Bank has upgraded Land Securities from ‘hold’ to ‘buy’ and downgraded British Land Company from ‘buy’ to ‘hold’ as it re-evaluates the UK real estate sector.

The investment bank said in its industry update on Monday that the sector is close to high cycle conditions.

“We believe we are close to high cycle conditions in London office given yields are at all time lows and rents are nearing all time highs,” it said.

“We think London office rental growth will continue given strong tenant demand and limited near term supply.”

However it also turned cautious on medium term office due to a number of risks including visibility on supply for 2018 onwards driven by high development activity, as well as new outer London hubs.

“On demand, weaker demand for space, business rates rises and Brexit are meaningful risks," it said.

“We note there are risks to expectations, including the perception of rental growth slowing, interest rate and credit spread rises, UK current account spurring inflation and Brexit.”

Deutsche Bank said that it downgraded British Land and adjusted its target price from 1,025p to 900p despite the investment bank liking its Canada Water development

“We are cautious given it intends to push ahead with office development in the city.”

Commenting on Land Securities, for which it also upgraded its target price from 1,280p to 1,450p, it said it liked the company’s strong asset base.

“Its strategy not to continue with further developments is the right one.

“We note that management intends to be a net seller of assets – given it has repositioned its retail portfolio, we expect an acceleration of office sales.”

Deutsche Bank also noted its top picks for the sector were Hammerson for its earnings growth and optionality on market rental growth, Workspace Group for its structural upside, and Great Portland Estates for its large special dividend.

Despite the rating and target price changes, shares in British Land were up 6.85p (0.84%) to 820.85p at 1149 GMT.

Shares in Land Securities were also up 22p (1.82%) to 1,228p.