London office property stocks including British Land Co. Plc and Land Securities Group Plc may rally a further 10% as demand for U.K. assets rises and as the country's economy accelerates, according to analysts at Morgan Stanley.
London office owner shares have rallied from lows in August after posting robust results and as the prospect of a no-deal Brexit has receded, but there could be further gains of 5% to 10%, the broker said, raising four U.K. landlord stocks to overweight.
“Our conviction in a better rental and capital growth trajectory in 2020/21 is increasing,” analysts led by Christopher Fremantle wrote in a note to clients.
The analysts think demand for U.K. assets will continue to recover as the picture on Brexit gets clearer and the economy grows. They now see annual rental growth of 2%-2.5% for the next couple of years, up from 1% previously. And this could rise to around 5% if more specific concerns around the challenge posed by flexible office space and excess supply abate, the analysts predict.
The office sector has been continually surprised at how well London offices have held up against the backdrop of political uncertainty. Business have continued to lease space and the latest round of earnings from the city's biggest landlords demonstrated the relative health of the segment in contrast to the weakness in U.K. retail property.
Morgan Stanley upgraded its recommendations on four of those landlords -- British Land, Land Securities, Great Portland Estates Plc and Derwent London Plc -- to overweight, with Derwent and Great Portland getting double-upgrades from underweight. All four rose on Thursday.
--With assistance from James Cone.
To contact the reporter on this story: Sam Unsted in London at sunsted@bloomberg.net
To contact the editors responsible for this story: Beth Mellor at bmellor@bloomberg.net, Jon Menon
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