Morgan Stanley sees 'compelling' opportunity with UK property stocks

"As many as seven of the 11 stocks we rate 'overweight' [in the sector] after UK-listed," Morgan Stanley said. These are: British Land, Derwent London, Great Portland Estates, Hammerson, Safestore, Segro and Unite.

"We are alive to the fact that broader UK exposure and offices as a sub-sector are out of favour, but at current valuation the risk reward is compelling in our view," the bank said.

Looking ahead, Morgan Stanley said that the REIT sector typically starts doing well towards the end of economic downturns.

"In recent decades, the listed UK property sector (in nominal terms, and on a total return basis) troughed a quarter before real GDP troughed. Are we there yet? Maybe, maybe not. The house view at Morgan Stanley is that 3Q23 will be the only quarter with negative sequential GDP growth but with risks to the downside. Even so, the trough in real GDP could be closer than some assume."

Meanwhile, it predicts that net asset value (NAV) valuation declines are likely over for the majority of companies, with metrics close to or already at all-time lows, which could be a "re-rating turning point" for many stocks.

It also pointed out that REITs historically have performed well in past crises once the Bank of England begins cutting rates. While we are not quite there yet – with the BoE only pausing its rate-hiking cycle last week – "the Bank no longer hiking is a significant signal, we argue".