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RBC initiates coverage on six property firms as it turns spotlight on UK real estate

Both LandSec and Tritax were given 'outperform' ratings on the back of an improved risk profile and exposure to the UK industrial property market respectively
British Land was initiated at a ‘sector perform’ rating and 550p price target

RBC has initiated coverage on six property investment firms as it moved its focus over to the UK real estate sector.

For British Land Company PLC (LON:BLND), which was initiated at a ‘sector perform’ rating and 550p price target, RBC said recent management changes at the FTSE 100-REIT had highlighted the extent to which the company had “shifted its focus from being a cyclical investor to a mixed-use, customer-focused operator” which in turn created new and different risks.

READ: British Land gets a lift from HSBC upgrade to ‘buy’ from ‘hold’ albeit after a cut to its price target

“We forecast declining [earnings per share] for British Land due (to) a combination of its planned disposals and a lack of like-for-like rent growth to offset cost growth. British Land's earnings yield has historically had a strong negative correlation with expected EPS growth, justifying its current above-average 5.9% earnings yield. While its financial gearing is lower, management's bold shift towards a more operationally focused business creates new risks.”

Fellow FTSE 100 firm Segro PLC (LON:SGRO) was also initiated at ‘sector perform’ with a 625p price target, although RBC said the firm’s “dramatic” transformation in its business and market had left it “very well placed to benefit”.

READ: Segro logs 43% rise in new leasing deals in third quarter

“We forecast Segro reporting double-digit underlying EPS growth for each of the next three years, mainly driven by it successfully delivering a large volume of developments. Our positive view of the prospects for industrial property markets and SEGRO's strong position within them, particularly in the UK, supports such forecasts. However, we believe the low 3.5% 2018 earnings yield implied by SEGRO's current share price reflects such growth.”

The final FTSE 100 initiation, Land Securities Group PLC (LON:LAND), was at ‘outperform’ with a 1,125p target price as the bank said the company’s share price multiples were “attractive given the overall quality of its balance sheet”.

“Landsec's shares currently trade on a 6.8% earnings yield; simply returning to its 5.3% average since 2000, implies 34% potential share price upside. We forecast small declines in Landsec's underlying EPS and [net asset value]/share, reflecting the weakness in London office and UK retail property markets that we forecast. However, this negative for the share price multiple is offset by the significant improvement in Landsec's risk profile over the last decade”.

Looking to the FTSE 250, RBC gave Derwent London PLC (LON:DLN) an ‘underperform’ rating with a target of 2,500p, forecasting gradual declines in the firm’s London office market rents and “gradual” rises in yields for “a number of years”.

READ: Derwent London founder and CEO to become chairman, Paul Williams to be next CEO

Analysts added that uncertainty around structural changes to the office markets meant Derwent’s “slightly above average” NAV discount of 15% was too small, pegging the firm with a 21% potential downside.

The bank took a more neutral approach to Hammerson PLC (LON:HMSO) with a ‘sector perform’ rating and 370p target, although analysts also forecast a 19% decline in EPS through to 2022.

READ: Hammerson weak as JPMorgan Cazenove downgrades to ‘neutral’ in cautious review of European property sector

“We forecast negative trends in Hammerson's key financial metrics for many years on the back of assumptions that appear conservative relative to management's expectations in some key respects. We believe this combination limits the likelihood of some of the significant de-rating in Hammerson's share price multiples reversing without a significant improvement in the macro outlook for retail property markets.”

Finally, the bank initiated Tritax Big Box REIT PLC (LON:BBOX) at ‘outperform’ with a 190p price target as the group’s exposure to the “largest logistics warehouses” meant it was “well positioned to benefit from a very positive long-term market trend”.

“We forecast that the land options to build from Tritax's recently agreed acquisition of db Symmetry adds significant accretion to our underlying EPS growth for each of the next three years. Our positive view of the prospects for the UK industrial property markets and Tritax's strong position within them supports such forecasts.”

In lunchtime trading Tuesday, British Land was up 0.8% at 587.8, SEGRO was down 0.5% at 648.8p, LandSec was up 0.9% at 893p, Derwent was down 0.8% at 3,241p, Hammerson was up 1.1% at 382.7p, and Tritax was up 0.4% at 137p.

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