The dividend yields of property giants Land Securities Group PLC (LON:LAND) and Tritax Big Box REIT PLC (LON:BBOX) are going to look especially striking if interest rates remain low for longer, as the market is currently predicting.
This was the main thrust of a note from RBC Capital Markets to clients on Monday, flagging that lower rates "increase the attractiveness" of Landsec's forecast dividend yield of 5.7% and Tritax Big Box’s 4.5% dividend yield for 2019/20.
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The market’s prediction of medium-term interest rates, based on UK 10-year swap rates, have declined by around 35 basis points over the last month, with five-year swaps following a similar path.
Over the coming three years, the Bank of England is only expected to raise interest rates by half a point, according to forecasts from Oxford Economics, down from the previous estimate for 1.1% of hikes over that period.
The RBC analysts said that lower interest rates would lead to lower average cost of capital for each of the FTSE 350 property companies in their coverage, which drove a 4% increase in their share price targets on average, which contrasts with a 2% decline in consensus' price targets over the last month and 3% over the last three months.
Two outperformers and two under?
Reassured by the “low risk profile” of its properties, RBC hiked Landsec’s price target 7% to 1,000p and reiterated its ‘outperform’ rating.
When updating its forecasts for Tritax to reflect slower interest rate increases there was limited impact seen to earnings in the near term, given the REIT’s longer-term debt.
Other shifts in price target were made by RBC to Derwent London Plc (LON:DLN), up 10% to 2,800p but still on an ‘under perform’ rating, the same rating that was still applied to Great Portland Estates PLC (LON:GPE) after the price target was upped to 550p from 525p.
Landsec shares were down a few pennies to 829p on Monday, while Tritax was flat at 154.03p.