Morgan Stanley raises targets on Segro and Unite, cuts Intu

Analysts at Morgan Stanley downgraded their recommendation on European property stocks from 'attractive' to 'in-line', arguing that there was now not as much potential as before for returns on an absolute basis.

Yet despite now expecting a lower total return profile (NAV growth + cash dividends as a proportion of NAV) "for almost every property stock in Europe", that should not impact on their relative returns, nor their order of preference, they said.

Furthermore, inflation would expose those companies which lacked pricing power while higher interest rates would place pressure on those with too much leverage, they added.

The former was true because property stocks tended to perform well in a rising inflation and rate environment, but mainly for those companies with solid rental growth as opposed to simply a nominal stream of cash flow that does not rise.

They went on to explain: "the biggest changes in price targets we are making mainly relate to shopping centre REITs for which we now assume more yield expansion. We also believe leverage will increasingly become a focus; our work highlights how the market has increasingly penalised stocks with above-average leverage."

As a result, the investment bank stood by is 'overweight' recommendation for shares of Segro, but lifted its target price from 720.0p to 760.0p. It also upgraded that for Unite to 'overweight', raising its targe from 850.0p to 930.0p.

However, the broker downgraded Intu Properties from 'equalweight' to 'underweight', slashing its target from 190.0p to 150.0p, explaining that it continues "to shy away from optically cheap stocks (wide NAV discounts and/or elevated earnings yields, often in the UK and/or with retail exposure)."