European property stocks are set for a fourth-straight week of gains amid easing interest rate expectations, but Barclays Plc analysts warn that investors are overly optimistic.
The Stoxx 600 Real Estate benchmark is poised to be the region’s top-performing sub-index this week, rising 3.8%. Markets have scaled back bets on Bank of England interest rate hikes amid signs inflation is cooling. That boosted sentiment toward a highly-leveraged sector that has been roiled by concerns around increased debt servicing costs and plunging asset values.
Still, Barclays analysts including Paul May urged caution in a note to clients published Thursday, warning against “the belief that rate cuts could come sooner rather than later” given recent consumer price figures. They say the impact from higher rates has yet to be fully reflected in balance sheet property asset values.
“Despite the better than expected UK CPI print, we continue to believe that hopes for material rate declines are too optimistic,” they said. “Real estate yields still have further to expand, and companies face headwinds from refinancing at current higher rates,” they added.
UK Inflation Falls Below 8% in Breakthrough Against Price Spiral
The Stoxx Real Estate Index’s fourth weekly rise is the gauge’s best run since November last year. It remains down 20% over the past year, however.
Bets on further rate-hikes receded in the UK after a softer-than-expected inflation print. Money markets are pricing the BOE’s key rate peaking at under 6%, compared to around 6.5% last week.
“When we have convincing evidence that the BOE has gained control over inflation, we can think about property yields stabilizing and prices finding a floor” added Sue Munden, a property analyst at Bloomberg Intelligence in London.
--With assistance from Greg Ritchie.
