Barclays has predicted “turbulence ahead” for U.S. real estate investment trusts in 2016, downgrading the likes of Vornado Realty Trust, General Growth Properties and Rouse Properties and citing headwinds like “rising interest rates” and “geopolitical uncertainty.”
The London-based banking giant downgraded Vornado to “equal weight” from a previous rating of “overweight,” citing “softer rental growth in its core markets” despite still viewing the Steven Roth-led firm as “a high-quality, well-run company that is one of the bellwethers of the REIT universe.”
Barclays said it does not “anticipate the same robust re-leasing spreads” in Vornado’s New York City office and retail portfolio compared to recent years, and also noted “mounting evidence that [New York City] retail rents may have hit an inflection point.”
It acknowledged, however, that the company’s largest development project – 220 Central Park South condo tower in Midtown – “may ultimately fetch a price in excess of 100 percent of cost” and bring an additional $3 to $4 per share in net asset value.
Vornado is spending an extraordinary $5,000 per square foot to develop 220 Central Park South, Roth said in the company’s third-quarter earnings call in November, though the project is aiming for a total sellout approaching $3 billion.
Barclays also delivered the same downgrade, to “equal weight” from “overweight,” to Chicago-based General Growth Properties and its retail mall spinoff, Bryant Park-based Rouse Properties.
Like Vornado, the bank said GGP has benefited from “robust re-leasing spreads” over the past few years as well as well as “investor appreciation for its urban street retail acquisition strategy.” But those benefits “appear to be dissipating” in 2016, with Barclays noting “formidable headwinds in the mall space.”
It also pointed to GGP’s stated plan to “no longer seek to acquire urban street retail” – a strategy Barclays said “makes sense given rising street retail values” and indications that the strong U.S. dollar may hamper international tourism, but also reduces the company’s upside given the lease-up of its prized Upper Fifth Avenue retail locations.
Rouse, meanwhile, recently received a takeover bid from shareholder Brookfield Asset Management that would see the Toronto-based asset management firm acquire the rest of the mall REIT’s outstanding shares at a 26 percent premium.
That premium “highlights the wide differential between public and private market valuations,” Barclays said, and “represents a good opportunity for Rouse.” But the bank said “investor acceptance of Class B assets” comprising much of the company’s portfolio has “dissipated,” with Rouse’s stock trading at a 52-week low prior to the Brookfield announcement this month.
Barclays delivered an altogether wary outlook for the REIT sector in 2016, citing the likelihood of another interest rate hike from the Federal Reserve this year and “solid but decelerating growth prospects” for REITs at large.
It also noted the potential impact of the S&P Dow Jones Indices and MSCI stock indexes breaking real estate stocks out into their own sector starting Aug. 31, saying the change could attract more investment or result in investors “rotat[ing] out of REITs as those stocks are removed from their benchmarks.”