Jefferies adjusted its UK real estate recommendations on Monday, upgrading Supermarket Income REIT, SEGRO and Big Yellow to buy and moving Hammerson to hold from underperform. The changes come alongside a stark warning: the brokerage sees the potential for artificial intelligence to materially reduce demand for office space in London, possibly mirroring a roughly 20% drop in rents that followed the tech downturn in the early 2000s.
The UK REIT index has underperformed broader domestic equities in recent years, delivering only a 4% return between 2023 and 2025 compared with a 44% gain for the FTSE All-Share over the same period. Jefferies' repositioning underscores its view that sector exposure and asset mix will determine which real estate companies weather evolving demand patterns.
The bank's report outlines a scenario in which rapid AI adoption, led by the United States, could depress white-collar employment and reduce office occupancy in the UK. Jefferies cites the 2000-2003 period - when office rents fell about 20% and roughly 50,000 jobs were lost following the technology bubble burst - as a historical parallel that could materialize again if AI drives 'jobless growth' in services industries concentrated in London.
To support its concern, Jefferies points to rising unemployment among U.S. college graduates, which climbed to 9.7% in 2025 from 7.8% in 2023, and to an estimate it cites that 40% of U.S. jobs face replacement risk from AI, particularly roles centered on drafting and information processing. Against that backdrop, the brokerage identifies office properties as the least favored segment within the UK REIT index, where offices account for 22% of portfolio asset value.
By contrast, Jefferies retained a preference for industrial and logistics assets, which represent 21% of the index and delivered 4.7% rental growth in the 12 months through December 2025. The bank expects office yields to reprice 10 to 30 basis points higher in 2026 depending on location, and projects MSCI All Property capital values to grow 1.3% in 2025 before declining 2.3% in 2027.
Jefferies updated price targets for several names after reviewing recent transactions and leasing activity. It raised Supermarket Income REIT's price target to 90 pence from 80 pence following the group's acquisition of a 123 million euro Carrefour portfolio in France at a 6.6% net initial yield. The brokerage forecasts a 7.3% dividend yield for the company with dividend coverage expected by fiscal 2027.
SEGRO's target was increased to 850 pence from 709 pence after it agreed a pre-let for an 86,000 square meter German distribution center. The report also notes SEGRO secured 89% of its 27 million pounds of annual development completions in 2025.
Big Yellow's target moved modestly higher to 1,225 pence from 1,200 pence despite a decline in occupancy to 78.2% from 80.5%. Jefferies highlighted the self-storage operator's comparatively strong earnings margin and reiterated its 2-3% guided growth for the business.
Primary Health Properties maintained its buy rating, with a target of 120 pence raised from 115 pence after completing a 1.6 billion pound acquisition of Assura. The combined portfolio, Jefferies notes, approaches 6 billion pounds with roughly 80% of income backed by government sources.
For its valuations, Jefferies relied on discounted cash flow models rather than net asset values. The bank's assumptions included a 1.39 beta, a 5.3% equity risk premium and a 4.5% UK 10-year gilt rate used as the risk-free rate.
Summing up the outlook for offices, Jefferies warned that AI-related adoption patterns could hollow out demand in London services industries, creating downside for office rents and values if white-collar job displacement accelerates. The brokerage quantified near-term repricing expectations for office yields and set out multi-year capital value projections for all-property indexes, while upgrading and repricing targets across a subset of UK REITs whose asset mix and recent transactions the firm judged favorable.