Morgan Stanley predicts a brighter future for “out of favour” UK property stocks in 2025 after a “lost decade”.

The broker noted the sector is “out of favour, buffeted around by top-down concerns, most recently around the UK budget and post the US elections.”

“We argue that markets are extrapolating the present; the future looks better with solid property fundamentals, falling rates, credit spreads that have normalised, capital markets that are opening and a macro calendar that should be less congested and therefore will likely dominate news flow to a lesser extent.”

“More emphasis on the bottom-up could do the trick,” the broker thinks.

Near-term Morgan Stanley sees most re-rating potential in British Land Co PLC, Derwent London PLC, Great Portland Estates PLC and Land Securities Group PLC, with a preference for British Land and Landsec as their high dividend yields means investors are ‘paid to wait’.

The broker has an ‘outperform’ rating on all four UK listed stocks.

“The UK has experienced a lost decade for real estate during which capital was deflected to other shores and confidence was low; but confidence is returning, balance sheets are healthy and assets have been marked down,” Morgan Stanley said in a note reviewing prospects for the European property sector in 2025.

More stocks should start delivering a return on equity that is closer to, or exceeds, their cost of equity, it thinks.

Morgan Stanley pointed out UK net asset values have started to turn, noting several companies reported September NAVs ahead of their March NAV.

This is an “important inflection point,” Morgan Stanley explained, noting that historically NAV growth turning positive has consistently been a “major re-rating event”.

“Real estate is a total return asset class with an income and capital growth component; when asset values (and therefore NAVs) fall, the income component is eaten up by capital value declines, which means investors make no return.”

“But when NAVs stabilise investors make the income part, and when they start rising, their return is further boosted by a non-cash capital growth element, which usually takes the return on equity closer to the equity market’s required return, triggering a major re-rating,” the broker explained.