Roiled by Brexit, Covid-19 and the most aggressive interest-rate hiking cycle in living memory, Europe’s publicly traded real estate investment trusts 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 Monday.
“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% of the benchmark Stoxx 600, failing to lure investment,” Munden 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 ($174 billion) market capitalization of property companies currently in the Stoxx 600 index represents an average 24% discount to the value of their assets.
Anaemic 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%-8%, she added.
While the prospect of rate cuts has helped lift real estate shares in recent weeks, analyst price targets remain on average just 10% 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 Plc last week agreed to buy Abrdn Property Income Trust. Shaftesbury Capital Plc was created last year through the merger of two of the largest landlords in London’s West End.
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