Amid fresh data on levels of office staff working from home and empty shops, analysts at Morgan Stanley have taken a red pen to most of London’s big property developers.
Land Securities PLC (LON:LAND) and British Land PLC (LON:BLND) were downgraded, while price targets were cut for Shaftesbury PLC (LON:SHB), Great Portland Estates PLC (LON:GPOR), Derwent London PLC (LON:DLN) and Capital & Counties Properties PLC (LON:CAPC).
This was not altogether surprising with data from Springboard on Thursday showing that 10.8% of shops across Britain were empty in July, up from 9.8% in January and the highest in years.
Meanwhile, there was fewer than six out of 10 (57%) of working adults traveling in to work in the last week in August, according to research by the Office for National Statistics, which this was up from 55% two weeks earlier and 33% in May.
One in five (20%) of working adults still working exclusively from home, though this was down from 22% a month earlier and nearly 40% in June.
Morgan Stanley’s own surveys on working from home, which tapped around 4,400 office workers across five European countries, suggest that over 40% of office workers who have worked from home during the pandemic would like to work from home 3-5 days a week and a further 35-40% would like to work from home 1-2 days a week.
In general around two-thirds think that employers will be sympathetic to a part working from home (WFH) policy, “given it allows companies to improve productivity, increase workforce satisfaction and retention, and cut costs.”
The bank’s European property analysts have cut their share price targets for nearly every office-focused stock they cover based on assumptions that office capital values will drop 6-7% by the end of 2021.
It could be worse than current estimates
“But we think that if we are wrong this could be worse, and we reflect this uncertainty by applying a wider target discount to all office-exposed stocks we cover,” they wrote in a note to clients on Thursday.
While shares in retail focused property developer “optically” look cheaper than ever, the analysts said “a lack of clarity on future share counts makes them quasi-uninvestible until balance sheet concerns are resolved”.
“Current office fundamentals are more resilient than what stocks are pricing, but the risk of a material capital value impact is significant; we fear office stocks could be value traps as the outlook remains uncertain over most time horizons”.
In terms of WFH rates, coronavirus has “created the potential to accelerate a trend that was already starting to accelerate pre-COVID”, albeit at different stages in different countries.
Even if the rate of WFH in the next decade grows at the same rate as 2019, that is by one percentage point per year, "conservative, we think", then Morgan Stanley predicts European WFH rates have the potential to nearly double.
This would take the rate from 13% of the workforce in 2019 into a mid-20s percentage in the next 10 years, broadly the same rate of change as UK e-commerce penetration over the last decade.
As a result, the preference is for companies with “the balance sheet to cope with most scenarios”, while avoiding stocks with above-average leverage.
LandSec and British Land were both cut to ‘equal weight’ from ‘overweight’, with their share price targets cut to 610p from 740p, and to 380p from 450p respectively.
Among the other price cuts, the biggest were CapCo, slashed 25% to 120p, and Shaftesbury, trimmed to 16% to 480p.
Going the other way, LondonMetric’s target was upped 20% to 240p and Segro 12% to 1,100p.