GENEVA-Global property stocks have, despite deteriorating fundamentals, had their biggest rally in 35 years since the trough in March but listed property is not attractive at current levels and the rally looks unsustainable, says Swiss bank Lombard Odier Darier Hentsch.

It is better to stay cautious, all the more so given the cautious outlook on equities and financials, and considering listed property's poor diversification value for now. Direct real estate on the other hand is attractively valued, and the drivers for a rebound are slowly being put into place.

"Some might argue that this valuation expansion simply reflects an anticipation of rising capital values, and that a pick-up in NAVs will soon absorb these premia," the bank said in a recent report.

"We don't think so, at least not in the short term. Fundamentals have not turned the corner yet. Capital values are falling sharply in the US,… They are stabilizing in continental Europe, albeit with discrepancies among countries, but rental markets are still under pressure from rising unemployment and vacancy rates. Falling rents, at an accelerating pace, typically translate into renewed downward pressure on prices."

Credit markets have improved overall, but access to capital and refinancing remain challenging, suggesting any recovery in direct markets is likely to be slow.

On the positive side, valuations of direct property have now become very appealing, especially in the UK, and to a lesser extent in continental Europe. Risk premia offer an interesting cushion to investors looking for stable income returns in a low interest rate environment, or for a hedge against a possible run-up in inflation. Global listed property shares have surged by 90% since their 9 March 9 base, led by the UK Singapore, and the US. They have outperformed industrial equities by a substantial margin of 35%.

Lombard Odier Darier Hentsch said part of the upturn was justified since some normalization in risky assets such as listed real estate was due when it became clear that an Armageddon-type scenario would be avoided. Listed property also benefited from the surge in equities, more specifically that financials. The high leverage property stocks largely outperformed the more defensive ones, reflecting investors' remarkable shift from extreme risk aversion to strong risk appetite.