The London REIT (real estate investment trust) sector may be ‘under attack’, according to analysts at Berenberg, but there are reasons to be cheerful.

While the companies ‘may have issues’, London property still has a place in the market, but in a different format, meaning firms will need to innovate if they are to be successful.

UPSIDE RELIES ON RENTAL GROWTH

‘Much has been written about the demise of the London office market, with many commentators comparing its current problems to the structural challenges that faced the retail sector several years ago. However, we are optimistic’, say Miranda Cockburn and Yudith Karunaratna.

‘Active demand remains buoyant, with more companies seeking to expand than contract – countering claims of the death of the office, although increased flexibility at the small end of the market is now non-negotiable. Therefore, we believe that there is no debate as to whether prime rents can grow from here’, add the duo.

However, the pair aren’t exactly bubbling over with enthusiasm for the sector, flagging the fact leases are taking longer to agree, and the quoted companies with the most exposure to London office properties - Derwent (DLN), Great Portland (GPE), Helical (HLCL) and Shaftesbury (SHC) - have weak as well as strong assets.

From an investment perspective, the companies ‘will remain low-yielding and will continue to be a total return proposition; therefore, rental growth and value creation are vital to providing the type of attractive NAV (net asset value) total returns generated by the companies prior to 2016’, say the team.

Shares suggested several weeks ago there were signs of life in the capital’s commercial property market.

There are signs of life in the London commercial property market

NEW RATINGS

Having previously dropped coverage, Berenberg has re-initiated research on all four stocks with Hold ratings on Derwent and Great Portland and Buy ratings on Helical and Shaftesbury Capital.

‘Our Buy rating on Helical is predicated on the company achieving letting successes and subsequent valuation upside, resulting in a reversal of some of the weak share price performance experienced this year’, say the team.

‘We are more positive on the outlook for Shaftesbury Capital, and we re-initiate with a Buy rating believing its retail and hospitality assets to be more resilient from a valuation perspective, alongside our expectation for a re-emergence of rental growth’, they conclude.

Helical shares rose 1.6p or 0.8% to 211.6p against a new price target of 253p, while Shaftesbury shares rose 1.9p or 1.4% to 135.4p against a price target of 160p.

---