Morgan Stanley Sees Drop for European Property Stocks

Morgan Stanley is expecting European real estate stocks to fall 10 percent by the end of next year and cut its rating on five property companies, including Land Securities Group Plc.

``We think property stocks will underperform the wider market,'' Morgan Stanley analyst Martin Allen said today in an interview. ``Investors focused on absolute returns should start to take money out of the quoted property sector in Europe.''

European real estate stocks have outpaced benchmark indexes since 2000 as investors sought alternatives to stocks and bonds, pushing up property values. This year the Bloomberg Real Estate Index has jumped 21 percent, more than double the 10 percent gain in the Dow Jones Stoxx 600 Index. U.K. property stocks have also risen twice as fast as the FTSE 100 Index this year.

Morgan Stanley cut Land Securities, Europe's largest property company, to ``underweight'' from ``equal-weight'' even as it raised its end-2007 price target 16 percent to 1,730 pence. The shares dropped 18 pence, or 0.9 percent, to 1,912 pence in London. A 10 percent decline from today would take the stock to 1,721 pence.

Rising interest rates are cutting liquidity from the global financial system, reducing the relative attraction of real estate, Allen said in a research note in March. Increasing numbers of share sales by property companies were making generalist stock investors more skeptical about real estate, he said. ``Valuations look increasingly strained,'' he said.

The REIT Factor

British real estate stocks could do better than Morgan Stanley expects ``if individual share investors in the U.K. were to become more enthusiastic about U.K. property shares on the back of the U.K. real estate investment trust structure,'' said Allen, based in London.

The U.K. plans to introduce low-tax REITs in January to make commercial real estate more accessible to individual investors. REITs will pay virtually no tax in return for distributing at least 90 percent of their taxable profit in dividends.

Morgan Stanley assumed the U.K. companies will convert to REITs next year in making its rating changes and in setting new price targets, it said.

Allen also cut Klepierre and Rodamco Europe NV to ``underweight'' from ``equal-weight.'' He reduced his rating on Unibail SA and Gecina SA, the two largest French real estate companies, to ``equal-weight'' from ``overweight.''

Allen raised his recommendation on two stocks. He upgraded Fadesa Immobiliaria SA, Spain's second-largest real-estate company, to ``overweight'' from ``underweight.'' He boosted Quintain Estates and Development Plc, a U.K. property company building homes and offices near London's Wembley stadium, to ``equal-weight'' from ``underweight.''

The companies rated ``overweight'' in the report are those whose share price is expected to fall by less than 5 percent by the end of next year, said Morgan Stanley. Shares in the ``underweight''-rated companies may fall by more than 10 percent.

Slough Estates Plc, which owns six of the 10 largest U.K. industrial parks, is the only company of the 18 covered by the report that Morgan Stanley expects to have a higher share price at the end of 2007 than now. Morgan Stanley's price target of 680 pence is about 4 percent higher than today's price.

Morgan Stanley, which last set price targets for the companies about a year ago, raised its targets for the end of 2007 by an average of 13 percent. The average increase in the U.K. was 17 percent and it was 9 percent in continental Europe. The FTSE 350 Real Estate Index has risen 45 percent in the past 12 months, and the Bloomberg Europe Real Estate Index has gained 43 percent in the same period.

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