LONDON (ShareCast) - (ShareCast News) - Exane BNP Paribas upgraded British Land to 'neutral' from 'underperform' and lifted the price target 6% to 700p on valuation grounds, as it took a look at the real estate sector.
"Having significantly underperformed the sector in 2016, we believe NAV weakness is now largely priced in and the highest funds from operations yield in our UK coverage offers valuation support in an uncertain environment for capital growth."

The bank said it remains 'underperform' on most of its UK coverage, however.

"Capital values rose modestly in the UK in Q4 2016 but the post-Brexit fallout is far from over in our view. Investment market liquidity has reduced, rental growth expectations have been cut, inflation has spiked and gilt yields are headed higher. This strongly favours a rise in UK yields, resulting in declining or flatlining UK NAVs for most companies."

Exane said it has no 'outperform' ratings on any of the UK property stocks, with four now rated at 'neutral'. These include Segro and Hammerson, which it considers to be better insulated from a Brexit-related slowdown by their non-UK exposure. It also rates Great Portland at 'neutral', expecting loan to value to fall to 0% in 2017, thanks to a substantially de-risked balance sheet.

Exane argued that German residential companies offer the most upside.

"From a fundamental point of view, we continue to see a lot of value creation potential for German residential companies. We continue to expect 11-13% growth on average in FFO/share for the three German residential growth companies we cover and 11-23% compound annual growth rate in net asset values (2015-end 2018).

"We believe that value creation is likely to be driven by further rental growth generated by modernisation programmes, yield compression, cost reduction and new initiatives."

At 1246 GMT, British Land shares were up 1.3% to 627p.

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