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Eurozone property stocks tumble as ECB driven rally questioned


[LONDON] Over 1 1/2 billion euros were wiped off eurozone property stocks on Monday as investors started to question a 25 per cent rally since December, fuelled by the prospect of money-printing by the European Central Bank.

Eurozone property shares have ridden a market rally over the past three months. The prospect of ECB bond purchases, which began on Monday, depressed bond yields and lured investors to the sector - it offers generous dividends and has thrived on low interest rates despite weak economic growth in the region.

Yet property values in the eurozone have so far lagged the equity rally. The stocks are trading at a 17 per cent premium to their net asset value (NAV), according to JPMorgan estimates. By comparison, UK real estate stocks trade at a 4 per cent discount to NAV and enjoy better economic conditions in Britain.

The STOXX Europe Real Estate index was down 1.8 per cent at 1351 GMT, leaving its market capitalisation at 85 billion euros, after JPMorgan analysts downgraded five stocks in the index. Among them were the Netherlands' Unibail Rodamco and France's Klepierre.

"It's clear to us that the UK offers better value at current levels and we can still buy on fundamental property reasons,"JPMorgan analysts wrote in a note.

"We see 12 per cent upside (to share prices) in the UK and just one per cent upside on the Continent."

UK real estate shares were also under pressure on Monday, however. They fell 1.3 per cent as investors worried about the growing likelihood of a US rate increase, which would affect borrowing costs across the world.

Eurozone real estate companies have been able to pay out generous dividends despite meagre or no rental growth thanks to low borrowing costs in a near-zero interest rate environment.

With a dividend yield of 4.8 per cent, the sector yields 210 points more than the broader Euro STOXX index of eurozone shares. It yields 440 basis points more than Germany's 10-year sovereign bond, Europe's most widely used bond benchmark, Datastream data showed.

Analysts warned this means the sector's rally lay on the shaky grounds of relative returns. Those are subject to hard-to-predict changes in interest rates across the world, rather than on economic growth, casting a shadow on its longer-term prospects.

"It's financial market-driven strength, and although there is a very large cushion, at some point ... it poses some risk,"said Ruud Van Maanen, an analyst at ABN Amro.