“UK property stocks may continue to outperform, particularly in periods of GBP strength,” the investment bank suggested, as the first UK services purchasing managers index survey of the year showing positive momentum and give hope of a bounce in economic growth in the first quarter.
Merrill Lynch said “we see investors looking for more UK exposure principally to London offices” on further hopes that a Brexit deal with the EU “should shape the investment market where volumes are down circa 50%”.
Overall, the analysts believe “nothing looks likely to really change for the real estate sector this year; negative and low rates are here for the long haul and investors are still starved of yield and diversification”.
“As such, returns will continue to look attractive to us versus other asset classes, as lower rates and a slightly better rental outlook should bring more capital value growth.”
“Property returns still look attractive against other asset classes in 2020.”
Upgrades and downgrades
Land Securities and Great Portland were given upgrades to ‘buy’ from ‘neutral’, adding further London growth at a “reasonable price” with respective 22% and 8% discounts to estimated net asset value for the current year.
Merrill’s analysts already had Segro, Derwent London and Workspace on their list of preferred fast-growing sector names, while disruption from online retail and Brexit is expected to weigh further on the properties owned by Hammerson (LON:HMSO) and British Land (LON:BLND).
The analysts downgraded the self-storage subsector because of its valuations after strong performance in 2019 led to valuation premium to the rest of the sector becoming “too stretched”.
Big Yellow (LON:BYG) to ‘neutral’ from ‘buy’ on a “lack of new catalysts” and Safestore (LON:SAFE) to ‘underperform’ from ‘neutral’ on its 25% premium to peers and new costs to support its European expansion in Spain and the Netherlands.