U.K. commercial and residential property values are in bubble territory again and vulnerable to any tightening in credit markets, according to Mike Prew, an analyst at Jefferies Group LLC.
Investors have been paying too much for real estate outside southeast England in the “delusional” belief that rents will climb strongly, Prew said in a note to clients. He downgraded retail specialists Hammerson Plc and Intu Properties Plc to sell from hold because income at some shopping malls is falling.
The analyst also cut his share-price targets for U.K. real estate investment trusts by 12 percent and said property values are likely to fall 1.1 percent next year, with retail the worst affected. The FTSE 350 Real Estate Investment Trust Index dropped 2.7 percent, the most in more than two months, at 8:54 a.m. in London, amid a wider market rout.
“The last time REITs were this good they needed rights issues nine months later,” Prew wrote on Monday. “Fresh money isn’t going into REITs, which yield less than the FTSE 100 with slower growth rates.”
Proposals by the Organisation for Economic Co-operation and Development to limit tax exemptions on debt would hurt real estate shares as property companies tend to have higher debt levels, Prew said.