UK property values will decline, but British Land and Derwent oversold - Deutsche

In a note to clients on Monday that noted that the sector now trades on a 30% discount to net asset value as the market prices in 20%-plus falls in rents and asset prices, Deutsche also reiterated its 'overweight' rating on European retail-focused Hammerson and its 'sell' recommendation on Intu as its focus on UK shopping centres offers more exposure to the downturn.

Land Securities, kept on 'hold' as more defensively positioned than British Land, with gearing at 22%, average unexpired lease term the longest in the sector and low development exposure, is "arguably the closest UK stock to a bond-proxy".

LandSec management's 'patient and disciplined' mindset "would prove the correct strategy to adopt in the event of a major downturn, [but] we believe the market correction will be less severe and acquisition opportunities limited". It's target price was upped modestly to 1050p.

Deutsche property sector analysts concluded that rather than the market's seeming anticipation of 20%-plus decline, one of 15% is "more likely" and as interest rates remain modest and the pound is still weak, "the disconnect between the investment and equity market offers opportunities for stock investors with a medium-term horizon".

British Land is thought to offer the best risk/reward as recent asset sales at or above book value make its NAV discount seem attractive, leading to its target price being lifted to 660p versus Friday's close at 599p.

BLND's portfolio is now weighted towards the less volatile West End and analysts said the near-term development pipeline should add "meaningful portfolio income", while share buybacks are evidence of "good capital management".

London office rents are forecast to decline 15% over the next two years as excess supply in the capital runs at 1.3 times the long-run average, driving vacancies especially in the City and "a tapering of take-up as many firms look to delay expansion decisions or reduce floorspace - albeit we believe this risk is overestimated".

Derwent London, the office specialist, is lifted off its 'sell' rating and target price yanked up to 2,750p from 2000p as the group "has a strong track record of delivering through-the-cycle returns above its cost of capital".

Derwent's high portfolio reversion drives a forecast 12% three-year compound annual growth rate for earnings per share that is felt to be "underappreciated" by the market, not to mention low financial services exposure with no core City weight also "overlooked", plus a focused development pipeline to boot.

Hammerson's 45% exposure to retail on the Continent drives Deutsche's anticipation of outperformance versus Intu, not to mention structural shifts in the retail industry.

"The polarisation of physical retail is gathering pace as many retailers look to reposition and rationalise their store portfolios to service the multichannel customer. We see online sales growth as a considerable threat to the owner of a mid-market shopping centre with little in the way of USPs, but to a lesser extent for the prime, experience-led centre."

Intu's target price was cut to 230p, implying 6% downside to Friday's close, while Hammerson's 650p target would offer double-digit upside.