U.K. REITs’ Net Asset Values to Decline Through 2013, Morgan Stanley Says

U.K. real estate investment trusts will see net asset values decline 5 percent this year and 6 percent the next as stagnant credit markets hurt property prices, Morgan Stanley (MS) analysts said in a research note.

U.K. commercial real estate values may fall 8 percent in 2012 and the amount of properties deemed “prime” will decrease because of the dearth of financing, according to the Morgan Stanley note on publicly traded real estate companies in Europe dated Jan. 4.

“More and more banks are suspending new lending to commercial property,” Morgan Stanley said. “It is highly likely that property as an asset class will experience some degree of re-pricing.”

European banks are shrinking their commercial property portfolios to pare their balance sheets and meet stricter capital requirements. Societe Generale SA and Eurohypo AG, Commerzbank AG’s real estate arm, are among banks that stopped making new loans, real estate adviser CBRE Group Inc. said last month.

“The rapidly reducing availability of bank lending to commercial property will drive a reclassification of what assets are considered ‘prime’,” Bart Gysens, a Morgan Stanley analyst in London who co-authored the note, said by e-mail. “Bank lending is vital for the property market, but unfortunately in the medium-term lending to commercial property is not a priority for most.”


It’s possible that the lack of new lending is a temporary phenomenon and that “meaningful” increase in money supply by central banks could offset some of the negative effects, Morgan Stanley said.

The New York-based bank said it has a favorable view of two German companies specializing in residential real estate, Deutsche Wohnen AG (DWNI) and GSW Immobilien AG (GIB), saying the companies’ “financing is sound and stock valuation remains undemanding.” It also said it likes companies focused on London.

Land Securities Group Plc (LAND), the U.K.’s largest real estate investment trust, and British Land Co. (BLND), the second-largest, were raised to “equal weight” because the pricing of their assets is realistic. Great Portland Estates Plc (GPOR), a developer focused on London’s West End, was raised to “overweight” because of its favorable debt-to-equity ratio and its potential to deliver better returns from development.

Publicly traded companies in continental Europe will see net asset values decline 11 percent this year and performance will be unchanged in 2013, Morgan Stanley said. Commercial property values in the euro zone, excluding Germany, could fall by as much as 15 percent this year, as the lack of finance hurts the industry.

Morgan Stanley said it’s less positive about France’s property companies, citing a continued rise in bank lending as a portion of total lending, meaning the banks may have to deleverage. It cut Gecina SA (GFC) to “equal weight” from “overweight.” Klépierre (LI) and Foncière des Régions (FDR) were downgraded to “underweight” from “equal weight.”

To contact the reporter on this story: Neil Callanan in London ncallanan@bloomberg.net

To contact the editor responsible for this story: Andrew Blackman at ablackman@bloomberg.net.

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