Europe’s Reits face death by private markets

ROILED by Brexit, Covid-19 and the most aggressive interest rate hiking cycle in living memory, Europe’s publicly traded real estate investment trusts (Reits) have never been so unloved.

Now, with potential new entrants preferring less market scrutiny and easier access to funding from private markets, the prognosis for publicly traded real estate is bleak, Bloomberg Intelligence analyst Sue Munden wrote in a research note on Monday (Jan 22).

“The fall from grace by European landlords since 2016 could signal the industry’s twilight, as Reits are hampered by discounted shares and, at just 1.37 per cent of the benchmark Stoxx 600, failing to lure investment,” she wrote.

Reits and daily traded property funds help retail investors get access to commercial real estate markets without locking up their cash over the long term. But the mismatch between the illiquid nature of real estate and the daily trading of public companies or funds has created issues for the sector, where share prices move ahead of asset values as sentiment sours, or funds are overwhelmed with investor requests for their money back.

Landlords, particularly those in the UK which has one of the largest Reit markets in Europe, have traded at steep discounts to their reported asset values for several years as a series of shocks dented confidence. The combined 160 billion euro (S$233 billion) market capitalisation of property companies currently in the Stoxx 600 index represents an average 24 per cent discount to the value of their assets.

Lacklustre returns and a series of take-private deals have seen the sector dwindle in size relative to the wider stock market, meaning it is now “unlikely to warrant attention as it contributes so little to overall portfolio performance”, Munden wrote. To combat this, the sector must deliver better dividend and asset value growth, targeting total returns above 7 to 8 per cent, she added.

SEE ALSO

Cromwell E-Reit’s Milan office asset ‘largely completed’

S-Reits expected to report muted performance this earnings season as interest costs stay high

DECODING ASIA

Navigate Asia in
a new global order

Get the insights delivered to your inbox.

While the prospect of rate cuts has helped lift real estate shares in recent weeks, analyst price targets remain on average just 10 per cent above current shares. That implies most companies are likely to continue to trade below their current asset values, given the size of the discounts at which they have been trading.

Landlords have responded to investor indifference with a series of mergers as they bid to gain scale and reduce costs. LondonMetric Property this month agreed to acquire LXi Reit, while Custodian Property Income Reit last week agreed to buy Abrdn Property Income Trust. Shaftesbury Capital was created last year through the merger of two of the largest landlords in London’s West End. BLOOMBERG