Market Report: Outlook on capital values unsettles property stocks

Commercial property stocks came under pressure last night, with the likes of British Land and Hammerson failing to make any headway as analysts turned their attention to the outlook for capital values.

Morgan Stanley highlighted recent movements in the Investment Property Databank derivatives market, which has been turning lower and now implies a 20 per cent slide in UK commercial property capital values between now and the end of 2015. Though unlikely, such a slump would depress property share prices by an average of 60 per cent, according to the broker. Net asset values could slide by an average of 35 per cent, stocks could once again end up trading down to "deep discounts" and investors could face "yet another wave of rescue rights issues and placings".

"We think it is unlikely [that] property values in the UK will fall that much," the broker said, pointing to its base case scenario, which "assumes broadly flat values for the quality owned by the majority of quoted property companies". Morgan Stanley's bear case scenario is also more benign, assuming that good quality property values drop by 10 per cent. Nonetheless, the broker added that, "with shares broadly fairly valued... we think the risk-reward profile is skewed to the downside as we see more scope for a significant correction than for continued improvement".

The concerns dampened the mood in the sector, with British Land closing flat at 457.1p and Hammerson easing by 0.4p to 385.4p. Land Securities at 621p, down 0.5p, Great Portland Estates at 312.1p, down 0.5p, and Derwent London at 1,379p, down 3p, also failed to book any gains last night.

Overall, the FTSE 100 was weak, shedding 28.38 points to 5,365.78, but the mid-cap FTSE 250 managed to rise by 39.72 points to 10,166.13. The blue-chip index turned lower following some early losses on Wall Street, with sentiment dipping on the back of an unexpected rise in the number of Americans claiming jobless benefits for the first time. The losses were capped by strength in parts of the mining sector, with bargain hunters, unfazed by some softness on the commodity markets, moving in to make the most of recent losses.

Antofagasta, for instance, was 5p better off at 1,023p despite copper prices easing in response to further signs of policy tightening in China, while the Eurasian Natural Resources Corporation closed at 985.5p, up 23p, and BHP Billiton rose to 2,025p, up 16p, last night. The precious metals producer Fresnillo was among the losers, retreating by 55p to 1,043p, after Citigroup published a warning on the miner's valuation.

"It is increasingly being priced as a gold stock, but the recent pullback in other gold shares has left our Fresnillo valuation offering little upside," the broker said, lowering the stock to "hold" from "buy". "Press speculation about possible M&A [mergers and acquisitions] activity relating to Fresnillo seems to have kept the valuation elevated while other gold stocks have fallen," Citi added.

Insurers were higher, with Aviva rising by 26.4p to 394.3p after issuing better than forecast half-year results. RSA Insurance was also ahead, gaining 5p to 133.5p, after posting its interim figures. In the banking sector, Barclays fell prey to a bout of profit-taking, shedding 4.7 per cent or 15.85p to 324p, after posting its results, confirming a slowdown in second-quarter income growth at Barclays Capital.

Lloyds, which smashed City hopes with its interim year profits earlier in the week, continued to gain ground. The Treasury's profit on its stake widened as the lender, aided by some supportive broker comment, rose by 1.54p to 76.03p. Bank of America Merrill Lynch hiked its target for the stock to 110p from 100p, while S&P Equity Research switched its stance to "buy" and Seymour Pierce moved Lloyds to "hold" from "sell".

Elsewhere, the food producer Dairy Crest was under pressure, trading down by 7.3p to 392p, after Panmure Gordon adopted a "sell" view. The broker expressed a preference for Robert Wiseman Dairies, which was 3p firmer at 512p after Panmure switched its stance to "buy". "We believe that a pricing anomaly exists between the two UK quoted dairies," the broker said, noting that, despite various negative factors, including the prospect of weak earnings growth, "Dairy Crest is trading at a 23 per cent premium to Robert Wiseman" in terms of enterprise value to earnings before interest, tax, depreciation and amortisation.

ITV was 0.8p stronger at 51.9p after Bank of America Merrill Lynch abandoned its negative stance. Back in July, the broker had expressed concern that management would shirk away from "the radical changes" needed to address the limits of the broadcaster's free-to-air model. Given the company's decision to move into pay TV, however, Merrill upped the shares to "neutral", saying: "Management has, in a positive break with the past, made pay TV an important part of its strategic thinking."

Further afield, Kesa Electricals rose by 2.7p to 136p following rumours of bid interest, with speculators touting chatter hinting at the prospect of a 200p per share offer.

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