European Real Estate Securities April 2012 Review & Outlook
Cohen & Steers
May 18, 2012
European Real Estate Securities
April 2012 Review and Outlook
We would like to share with you our review and outlook for the European real estate securities market as of April 30, 2012. For the month, the FTSE EPRA/NAREIT Developed Europe Real Estate Index had a total return of –1.2% (in U.S. dollars, net of dividend withholding taxes). By comparison, U.S. REITs had a total return of +2.9%, as measured by the FTSE NAREIT Equity REIT Index. Year to date, the indexes had total returns of +11.4% and +14.0%, respectively.
Following a strong first quarter, European real estate securities eased lower in April amid worrisome economic data and heightened political uncertainty. Renewed concerns over Spain’s finances caused bond yields to rise across much of the region, while banks remained under pressure to raise capital, leading to further tightening in the credit supply.
Economic reports for the first quarter confirmed that conditions have deteriorated, with no growth in France, recession in the U.K. and worse-than-expected contractions in southern states. The data threw into doubt whether various countries would be able to meet their budget goals and called into question the efficacy of current austerity measures. Political backlash over austerity increased, as expressed in regional elections.
The U.K had a modest +0.4%(see note) total return, as inflation pressures intensified and the economy shrank for a second consecutive quarter. Retail property fundamentals remained challenged, while prime office markets such as London’s West End showed improvement.
Switzerland (+5.0%) led all European property markets, benefiting from its perceived status as a safe haven within the region, as well as its stable economy, with rising consumption trends supported by sustained high population growth. Sweden (+1.6%) also outperformed, as domestic demand and exports showed signs of improvement.
France (–4.5%) struggled amid high unemployment and flat first-quarter GDP growth, as well as uncertainty surrounding its presidential election. We saw further evidence of a polarization between prime retail locations and secondary properties, although this was not reflected in April’s share-price performance. For example, Unibail-Rodamco, which owns mostly high-quality malls, reported that its tenants saw retail sales growth of 3.3% from the prior year, suggesting significantly better results from the national average.
In the Netherlands (–6.2%), budget negotiations collapsed between coalition party members, as the country continued to grapple with debt issues that have put its AAA credit rating at risk. Dutch real estate companies also faced worries about their pan-European property portfolios.
Our base-case scenario for Europe is a moderate recession, with strength in Germany and Scandinavia contrasting sharply with far more severe conditions in the southern region. We see meaningful economic headwinds over the foreseeable future as Europe attempts to bring its fiscal imbalances under control. Furthermore, unlike in many other parts of the world, inflation rates remain elevated (albeit slowing), giving the European Central Bank little room to cut interest rates.
Despite these challenges, we believe valuations for many listed real estate companies have reached levels that are likely too low on a relative basis. We continue to closely monitor macroeconomic developments, and remain focused on companies that we think are best positioned to shield themselves from the adverse effects of deleveraging. Specifically, we generally favor high-quality companies with strong balance sheets and relatively low cash flow multiples. We continue to like London offices and the Berlin residential market. We also favor landlords with prime retail assets in northern European markets, where consumer spending is relatively healthy.
Note: Country returns are in local currencies as measured by the FTSE EPRA/NAREIT Developed Europe Real Estate Index.
(c) Cohen & Steers