UBS has downgraded Hammerson PLC (LON:HMSO) to ‘neutral’ from ‘buy’ on concerns over the property firm’s high leverage and weakening retail trends.
The real estate investment trust’s (REIT) retail portfolio has outperformed its peers, especially since May but UBS thinks the real estate investment trust will gradually be more affected by the retail sector’s headwinds.
READ: Morgan Stanley cuts Hammerson to ‘equal-weight’ from ‘overweight’ after refreshing its forecasts in wake of recent interims
“The company announced its much anticipated new strategy. It encompasses a portfolio refocus, operational changes and capital allocation decisions. While Hammerson is confident this will lift internal growth for the medium-term — i.e. it guides to +3-6% p.a. for 2019-2021, our view is less positive.
"The group's performance in the first-half was +1.6% and we expect structural headwinds to continue to intensify from this point,” the Swiss bank said as it chopped its 12-month price target to 490p from 600p.
Tenant failures and rationalisation have been blamed on Brexit but UBS’s analysis indicates the sector is not experiencing a short-term disruption – it’s more a long-term trend.
READ: Hammerson drives another nail into the coffin of retail parks
The REIT has announced it plans to exit from retail parks but UBS doubts Hammerson will be able to sell its £1.1bn retail park portfolio at current book values. The portfolio is so large and rental growth trends and occupancy rates are such that Hammerson’s bargaining position is soft, according to UBS.
Ongoing disposals are likely to prove that reported asset values are inflated, UBS predicts.
“We, therefore, pencil in a 100 bps yield expansion over the period, from a 5.5% to 6.5% net initial yield. This translates into a 16% capital value decline,” the bank said.