LONDON (ShareCast) - (Sharecast News) - Analysts at Berenberg initiated coverage on real estate firms Derwent and Great Portland at 'sell' on Wednesday as part of a note on the broader sector.
Berenberg said the listed London office market had many attractions for both UK and international investors, including providing exposure to a real estate market in "one of the world's leading cities", but warned that the sector appeared to be "walking a tightrope".

"Although we acknowledge an improvement in portfolio quality and applaud the deleveraging activity undertaken to date, we still expect a cyclical market correction to impact the listed sector meaningfully," said the German investment bank.

"Capital values and rents are at all-time highs and have begun to turn, while increasing tenant expectations are putting pressure on operating margins and increasing building obsolescence."

Discussing Derwent, Berenberg said despite outperformance over the cycle to date, it expects market challenges to have a material impact on the valuations of Derwent's assets.

Berenberg also noted that with a higher proportion of its portfolio under development, a "significant proportion" of development upside already appeared to have been reflected and warned it may even need to be revised should the cycle slow.

Over at Great Portland, Berenberg pointed out that Great Portland Estates has a greater weighting toward secondary assets, much like Derwent, and warned that it felt there were some development execution risks, especially if those asset values were to fall.

"If the cycle continues, despite the ongoing accretive share buyback, Great Portland is arguably under-geared," said Berenberg.

"We think there is the greatest potential for consensus downgrades at Great Portland Estates, especially if further asset sales are concluded."

Berenberg hit Derwent with a price target of 2,650p, while it issued Great Portland with a 600p per share target.

Email this article to a friend

or share it with one of these popular networks:

• DIGG
• FACEBOOK
• STUMBLEUPON
• MIXX
• YAHOO BUZZ
• DELICIOUS
• REDDIT
• NEWSVINE