The FT property share index rose 3% on Tuesday and another 4% in early Wednesday trading after CSFB analysts Alan Carter and Mike Prew upgraded their recommendation from neutral to overweight. The pair favour MEPC (+16.5p to 422.5p on Tuesday), Hammerson (+18.5p to 372p), Brixton and Burford. Land Securities, which they upgraded from sell to hold, finished at 800p (up 29.5p) on Tuesday and British Land, which they still recommend as a sell, rose 16.5p to 473p.
Carter and Prew say their more bullish outlook is due to the prospect of UK interest rates falling to converge with those of Europe and the US. Although they still believe rental growth will be pedestrian (in line with inflation at around 2.5%), lower financing costs will aid investment, which in turn will cause yields to fall and values to rise.
'We regard the covergence of short-term domestic interest rates and the normalisation of the acutely inverted yield curve as critical, with the advent of the Euro as pivotal,' they say.
'Postive interest rate momentum should outweigh negative corporate earnings surprises, and against a year-end FTSE 100 target of 6200, we expect modest outperformance momentum later this year.' And the property sector needs some good news. Carter and Prew kicked off 1998 by announcing they were sellers of property shares. By the end of the year, the property share index had dropped 22% to 1669, compared with an 11% rise in the overall stock market. This 30% underperformance left the sector relative at an all-time low of 62.0, compared with the 64.4 prior to Sterling's exit from the ERM in September 1992.
Property share prices dropped from the 20% premium ratings in January 1998 to 25% discounts in December. The sector's market capitalisation shrunk from £22bn to £16bn during the year– just 1.4% of the FT All-Share Index.