London property is now a 'bubble', claims top analyst
UK commercial and residential property values are in bubble territory again and vulnerable to any tightening in credit markets, according to Mike Prew, an analyst at Jefferies Group.
Investors have been paying too much for real estate outside southeast England in the "delusional" belief that rents will climb strongly, Prew said in a note to clients.
He downgraded retail specialists Hammerson and Intu Properties to sell from hold because income at some shopping malls is falling.
The analyst also cut his share-price targets for UK real estate investment trusts by 12pc and said property values are likely to fall 1.1pc next year, with retail the worst affected.
The FTSE 350 Real Estate Investment Trust Index dropped 2.7pc, the most in more than two months, in London, amid a wider market rout sparked by China. "The last time REITs were this good they needed rights issues nine months later," Prew wrote yesterday.
"Fresh money isn't going into REITs, which yield less than the FTSE 100 with slower growth rates."
Proposals by the Organisation for Economic Co-operation and Development to limit tax exemptions on debt would hurt real estate shares as property companies tend to have higher debt levels, Prew said.
London property prices have surged in an almost uninterrupted boom since a blip in 2008.
The relentless growth has helped turn London real estate into an asset class along the same lines as stocks, bonds and other products.
In central London in particular, the price growth has attracted a rash of foreign buyers, many of whom do not use their properties other than as a method to store value. (Bloomberg)