Jefferies keeps 'underweight' rating on property sector

Jefferies has retained its ‘underweight’ rating of the UK property sector and held fast on most of its ratings, but has upgraded Unite Group to ‘hold’.

In a note issued on Monday, the investment firm said the London market stuttered in the last quarter of 2015, with shares in the real estate investment trust shares falling 19% since it downgraded the sector in August.

“This isn't just a China trade,” it said. “A slew of big ticket London office trades fell over in 4q15 and those that printed have been at a -10% clip to pricing.

“London has been a petro-dollar driven market with 1 sq ft of prime West End office space costing the equivalent of 90 barrels of oil, and the City 45 barrels.”

Jefferies also noted that companies are avoiding long-term liabilities ahead of the BREXIT referendum, new lease accounting rules and a hike in commercial property occupier taxes next year.

“The market risk is of legislation to clamp down on corporate tax shopping which could degrade leveraged real estate vehicles although REITs may be exempted.

“Landlords might like appraisers ERVs but these are becoming unaffordable and delinquency risk is rising.”