Shares of four prominent property companies in the UK experienced a downturn after investment bank Jefferies adjusted their ratings. The bank based its decision on predictions that office rents in London are on the brink of recession.

Here’s a snapshot of the affected companies:

• British Land (BLND): Shares dropped by 1.9%, settling at 320p.
• Derwent London (DLN): Experienced a decrease of 1.6%, bringing their shares to £18.79.
• Great Portland (GPE): Shares were down 3.5%, resting at 417p.
• Land Securities (LAND): Saw a 2.2% decrease, with shares priced at 592p.

Scepticism Surrounding Rents and Occupancy

The negative stance on office rent and occupancy was driven by analysts Mike Prew and Sarim Chaudhry. They both downgraded their recommendations for all four aforementioned companies. Their primary concern? The belief that offices would be the next domino to fall after the decline observed in the retail sector.

Several points raised by these analysts include:

1. Decreased Utilisation: There’s a noticeable decline in how office spaces are being used. Landlords, as a result, are losing their bargaining edge.
2. High Vacancy Rates: Vacancy rates have surged to a 30-year peak. West End’s vacancy is at 7%, the City at 10%, and Canary Wharf potentially over 20%.
3. The Work-from-Home Impact: They project a 20% decrease in London office utilisation due to remote and hybrid working trends.

However, not everything is grim. The analysts expressed positivity towards ‘Beds, Meds, and Sheds’, anticipating them to experience structural growth. They predict that the low operational costs of these sectors would ensure a higher conversion of rental income into earnings.

Companies that could benefit include:

• Accommodation sector: Empiric Student Property (ESP), Grainger (GRI), PRS REIT (PRSR), and Unite Group (UTG).
• Logistics and industrial sectors: LondonMetric Property (LMP), Segro (SGRO), and Tritax Big Box (BBOX).

A Ray of Optimism from Morgan Stanley

Contrary to Jefferies’ viewpoint, Morgan Stanley’s analysts see a silver lining. They believe UK property firms present an “enticing opportunity.” Their optimism stems from:

1. Robust Balance Sheets: These companies are well-capitalised in terms of asset evaluations and net asset value (NAV).
2. Historical Performance: Property stocks usually fare better towards an economic slowdown’s end.
3. NAV Decline is in the Past: They argue that most sectors, including accommodation and logistics, have already experienced their lowest NAVs.
4. Potential for Re-rating: The current undervalued status of property stocks by institutional investors could mean a potential rush to buy shares once recovery starts.

Concluding Thoughts

The contrasting opinions between Jefferies and Morgan Stanley underscore the complexity and unpredictability of the property market. For potential investors, it’s essential to stay informed and consider multiple perspectives before making a decision.