Shares in London-focused real estate groups were under pressure Wednesday after Jefferies downgraded much of the sector as the work-from-home trend creates a surplus of space.
“Retail was technology’s first casualty and we think offices are next,” said the equity research team at Jefferies led by Mike Prew. “We estimate a 20% contraction in London office utilization on WfH and hybrid working.”
These pressures have left vacancies at a 30-year high, with the West End of London on 7%, the City Of London at 10% and Canary Wharf greater than 20%, and with the tipping point for a rental recession historically at about 8% of vacancies, said Jefferies in a note published on Wednesday.
Funding of the sector is also being hurt by the sharp rise of interest rates as the Bank of England continues to fight inflation that remains stubbornly above its 2% target. “Investment market liquidity is receding on rent uncertainty and squeezing developer profits…with the City leveraged and becoming less fundable with increased uncertainty over tenants renewing their leases,” said Jefferies.
Shares in London-listed British Land
BLND,
and Land Securities
LAND,
were downgraded from hold to underperform, while Great Portland
GPE,
and Derwent London
DLN,
were cut from buy to hold.
The quartet’s shares fell between 2% to 4% leaving the FTSE 100
UK:UKX
down 0.3%. Meanwhile, shares in mid-cap Ithaca Energy
ITH,
rose more than 8% after the U.K. government approved the Rosebank offshore development off Scotland.
Germany’s DAX
DX:DAX
lost 0.3% and the CAC 40
FR:PX1
in France eased 0.1% amid cautious global sentiment following recent heavy declines on Wall Street.
The Dutch financial sector was in the crosshairs, with NN Group’s
NN,
stock down 15% after the insurance and asset management group delivered first half results that disappointed the market.
In forex, sterling
GBPUSD,
and the euro
EURUSD,
hit six-month lows against the dollar as traders continued to bet that U.K. and eurozone interest rates may have peaked but the U.S. Federal Reserve was still minded to tighten policy further.
However, technical indicators suggested the sell-off in the European currencies was looking very stretched, with the relative strength index of the EUR/USD hitting 22 and that of the GBP/USD falling below 14, according to data from CMC Markets.
An RSI below 30 is considered to be in oversold territory, and the last time the GBP/USD RSI hit such a low level was at the height of the U.K.’s bond market turmoil a year ago, after which the pound rallied sharply.
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