U.K. REITs cut to “underperform” as debt risks weigh on returns: Jefferies

Investing.com -- Jefferies has downgraded Land Securities (LON:LAND) and British Land (LON:BLND) to “underperform,” citing structural debt risks and weakening returns across the U.K. REIT sector. 

Price targets were reduced to 492p from 556p for Land Securities and to 298p from 364p for BLND, reflecting margin pressures and reduced investor confidence.

Land Securities’ pivot to the build-to-rent sector is seen as high-risk due to the execution challenges of organic platform development and lower yield potential. 

Its £135 million greening budget was also flagged as insufficient relative to its portfolio scale. 

Meanwhile, British Land is losing balance sheet control through asset sales into joint ventures and is entering logistics and life sciences late and at a high cost. Its 32% weighting in retail warehouses was identified as a relative positive.

Sector-wide, Jefferies raised its weighted average cost of capital (WACC) to 11%, the highest since 1998, while portfolio returns are expected to average just 6%. 

The brokerage noted that REITs are not earning their cost of capital, and negative leverage persists, with property yields below financing costs. 

Public REITs, which hold less than 5% of the commercial property market, remain price takers in a broader system still grappling with post-pandemic value discovery.

Office assets are particularly pressured, with values down 35% since 2020 and investment volumes 75% below the 10-year average. 

Bid-offer spreads remain wide at 15–20%, and refinancing challenges have stalled transactions. 

Jefferies expects continued underperformance in non-prime offices, while premium assets retain limited support from sovereign capital.

Jefferies’ economic rent model shows a 5% decline spread between expected returns and WACC, supporting an implied 30% discount to NAVs.

The brokerage argues that while REIT share prices may appear cheap, they do not reflect attractive value due to deteriorating fundamentals. 

Concerns over the encashability of NAVs and a cautious debt market have further curbed optimism.

The brokerage also notes a slowdown in M&A activity, with fewer viable targets and a narrowing gap between offer prices and undisturbed NAVs. 

Recent deals, such as Long Harbour’s discounted offer for PRS REIT, illustrate growing caution in the private market, driven by financing constraints.

Jefferies’ outlook is bearish across much of the U.K. REIT landscape. It sees little room for rerating unless interest rates fall significantly or earnings materially improve.