Sector Screener: two FTSE 100 property stocks with upside potential

While the internationally focused FTSE 100 index has surged 16% higher over the past year to post a series of new all-time highs, several UK-focused sectors have lagged well behind.

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Among them is the FTSE 350 Real Estate Investment Trust (REIT) sector. Even though it has moved marginally higher in the past month, the sector has still declined by 5% over the past year, largely as a result of its members’ overwhelming reliance on a vastly underperforming UK economy.

Differing performance

Indeed, a buoyant US economy and relatively upbeat growth prospects in emerging markets have boosted the UK large-cap index’s performance, with over four-fifths of its constituents’ sales generated abroad. But UK-focused REITs have had to contend with domestic economic growth of just 0.3% and 0.1% in the two most recent quarters, respectively.

Alongside persistent above-target inflation that has put continued pressure on consumer spending, this has weighed on demand for commercial property, investor sentiment towards the sector and valuations among several REITs.

An uncertain near-term outlook

In the short run, it would be wholly unsurprising for this trend to persist and for the REIT sector to further lag the wider stock market’s performance. The downbeat “haze” surrounding UK-focused companies is, after all, likely to take time to clear, with the Bank of England forecasting inflation will fall to its 2% target only at a gradual pace over the next 18 months.

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Interest rate cuts enacted over the past 15 months are now likely to begin to have their desired impact on GDP growth due to the passing of time lags, but the nature of monetary policy easing has been staggered. As a result, and with geopolitical risks likely to remain elevated even in the aftermath of the upcoming Budget as the effects of fiscal policy tightening become clear, short-term growth prospects for the UK economy remain challenging.

Source ShareScope. Data at 25 November 2025. Past performance is not a guide to future performance.

Source ShareScope. Data at 25 November 2025. Past performance is not a guide to future performance.

Long-term recovery potential

Of course, exceptionally low market valuations across the REIT sector factor in an uncertain near-term outlook. It is relatively straightforward to unearth sector incumbents that trade at a substantial discount to net asset value (NAV). This provides a wide margin of safety to account for near-term economic uncertainty, as well as scope for significant capital gains as the UK’s economic outlook gradually improves over the long run.

Indeed, a prospective decline in inflation, while gradual, should allow the Bank of England to implement further interest rate cuts over the coming months. When combined with the impact of recent monetary policy easing, this should ultimately lead to stronger GDP growth, higher demand for commercial property and scope for rent rises across a range of REIT segments that boosts the financial performance of sector incumbents. In time, this should produce improved share price performance.

Investment considerations

Given the uncertain near-term outlook for the FTSE 350 REIT sector, however, it is imperative that investors focus only on companies that have solid financial positions. In practice, this means checking that a firm’s loan-to-value (LTV) ratio is not excessive and that its operating profits comfortably cover net interest payments.

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Similarly, the sector’s poor recent performance and uncertain near-term outlook mean investors should demand a wide margin of safety even when purchasing a high-quality, fundamentally sound REIT. At present, this is likely to mean only buying those companies that trade either on a price/book (PB) ratio of less than one or at a very modest premium to NAV.

Over time, such companies appear likely to deliver significant capital gains as their operating environment gradually improves and investor sentiment becomes less downbeat. This process, though, is likely to take place over a multi-year time frame. Investors, therefore, will require a significant amount of patience should they decide to apportion hard-earned capital to UK-focused REITs.

Source ShareScope. Data at 25 November 2025. Past performance is not a guide to future performance.

Land Securities

Land Securities Group (LSE:LAND)’ share price has fallen 4% in the past year, so still outperformed the wider FTSE 350 REIT sector by 1.5 percentage points, and it trades on a PB ratio of just 0.7. This suggests that it offers good value for money on a long-term view.

The FTSE 100-listed REIT is well placed to take advantage of an improving long-term UK economic outlook. It is entirely focused on the domestic economy, with its range of office and retail locations, which are now largely situated in London, likely to experience an improved operating environment that could lead to a growing level of rental income.

Indeed, the firm’s recently released half-year results included an upgrade to financial guidance for the full year. The company now expects like-for-like net rental income to increase by 4-5% versus a previous forecast of 3-4% in the current year.

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It also raised its estimates for earnings per share (EPS) in the 2030 financial year to 62p from 60p. If met, this would equate to growth of 4.3% per annum from 2025’s level. When combined with the potential for an upward rerating, given the stock has a relatively modest earnings multiple of 12, as well as a dividend yield of 6.9%, this suggests its total return potential is attractive.

Of course, Land Securities faces an uncertain near-term outlook because of challenging short-term economic prospects. While this could cause heightened volatility in its share price, the company’s LTV ratio of 38.9% does not appear to be excessive. Moreover, the firm expects this figure to decline to below 35% over the coming years, while net interest cover of five in its latest full year suggests its financial standing is relatively sound.

Segro

Fellow FTSE 100-listed REIT Segro (LSE:SGRO) also appears to have a solid balance sheet. The company’s latest trading update stated that its LTV amounted to 32%, while its net interest costs were covered 10.5 times by operating profits in the most recent financial year. Both figures suggest it has the financial means to both overcome an uncertain near-term outlook for the UK economy and invest for long-term growth.

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The company generated around 80% of its net rental income from within the UK last year, with the remainder derived from Continental Europe. It is well placed to take advantage of an improving consumer outlook amid falling inflation and interest rate cuts that should lead to stronger operating conditions for the logistics companies that form a large part of its tenant base. And with the firm being well placed to capitalise on growing demand for data centres, its financial performance could improve in future.

Having declined by 11% and lagged the FTSE 350 REIT sector by over five percentage points in the past year, Segro trades on a PB ratio of around 0.8. While further share price volatility cannot be ruled out amid an uncertain economic period, the stock’s valuation suggests that investors have factored in a challenging near-term outlook.

As a result, the stock appears to offer recovery potential on a long-term view. When combined with a dividend yield of 4.5%, the shares could produce relatively attractive total returns over the coming years.

Robert Stephens is a freelance contributor and not a direct employee of interactive investor.