London Office Developers Decline Following BofA Merrill Lynch Downgrade

Land Securities Group Plc (LAND), Great Portland Estates Plc (GPOR) and Derwent London Plc (DLN) fell in London trading after BofA Merrill Lynch Global Research downgraded each of the U.K. property developers.

Land Securities, the country’s largest real estate investment trust by market value, dropped 3.9 percent, Great Portland declined 2.9 percent and Derwent lost 2.5 percent.

“It may be appropriate for the sector to trade at a premium in anticipation of growth,” a team at BofA Merrill Lynch led by Bernd Stahli wrote in a note to investors today. “However, in the current economic environment, where growth is absent, we believe a premium is hard to justify.”

In June, commercial real-estate values in the U.K. rose 0.1 percent from the previous month, the smallest gain since the market started recovering from a slump two years ago, Investment Property Databank Ltd. said Aug. 12. The slowdown may prompt Great Portland to delay three London developments, the BofA Merrill Lynch analysts said.

The projects are at Fetter Lane, 100 Bishopsgate and Blackfriars Road. Charlotte Whitley, a spokeswoman for Great Portland, declined to comment.

The FTSE 350 Real Estate Investment Trust Index of 11 stocks including the three developers was down 1.87 percent at the 4:30 p.m. close in London. The FTSE 100 Index fell 1.01 percent, extending yesterday’s 4.5 percent decline, the biggest since March 2009.

Dissipating Market

Growth in the London office market appears to be dissipating and “retail is unlikely to drive much performance going forward,” according to the BofA Merrill Lynch report.

It would “probably be prudent” to make projects such as London-based Land Securities’ 37-story tower at 20 Fenchurch Street, known as the Walkie Talkie, conditional on the company having tenants in place, Stahli and his team said.

The tower, scheduled to be completed in 2014, is a so- called speculative build, meaning no one has yet agreed to lease space in it.

While Derwent’s balance sheet is solid and management has a strong track record, the downgrade is warranted as capital growth in London offices is expected to stall and rental growth to decline, the BofA Merrill Lynch team said.

The firm downgraded its rating for Land Securities to “neutral” from “buy” and changed its ratings for Great Portland and Derwent to “underperform” from “neutral.”

Derwent spokeswoman Bridget Walker and Lesley Van Dijk, a spokeswoman for Land Securities, declined to comment.

To contact the reporter on this story: Chris Spillane in London at

To contact the editor responsible for this story: Andrew Blackman at

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