European real estate stocks are not exactly in a sweet spot at present, given the ongoing turmoil in global share markets and the worst start to a year in two decades, largely attributable to growing concerns about plunging oil prices and China’s slowing growth.
Earlier this month sentiment at London’s EPRA Insight meeting was indeed bearish albeit for different reasons as the discussion revolved around the possible end of a cycle for UK stocks. In contrast, the Amsterdam event held by EPRA earlier this week was far more positive. Investors are playing catch-up in the Benelux market, attendees heard, spurred by cheap debt and a high real estate-bond yield gap.
Speaking at the Amsterdam event, Erik Langens, executive director at CBRE, summed up the prevailing mood at both events with the comment that opportunities today lie on the continent. The Dutch market is particularly well placed, he said, as core investors that ‘have been sleeping for some years now’ collectively wake up to the opportunities.
According to this year’s ULI/PWC Emerging Trends report, Amsterdam ranked in the top 10 of most attractive cities in Europe in terms of prospects for investment for the second year running. The Dutch capital has higher yields than most other cities on the continent and market experts say there is still ample room for yield compression in most segments.
Sectors to watch
More generally in the Netherlands, prospects are particularly favourable for the logistics sector where listed Benelux warehouse specialist WDP is currently riding high on the e-commerce revolution. ‘For us the Netherlands is an interesting market,’ CEO Joost Uwents told the Amsterdam event. ‘With logistics, everyone thinks of non-food e-commerce, but we are only at the beginning of the growth curve once a solution has been found for everything that is fresh and frozen.’
Healthcare is another sector to watch, since demand in the Netherlands is exploding on the back of a rapidly ageing population as well as new legislation which is leaving the provision of accommodation to individuals and the market, according to Jean-Edouard Carbonnelle, CFO at Belgian healthcare specialist Cofinimmo. While the entire European market for healthcare is growing, the Dutch market is really opening up, he said. Even the much-maligned Dutch office sector is slowly getting back on track as investors have finally started tackling the legacy of oversupply.
That said, strengthening recovery is the story in most of Europe’s major cities, the Emerging Trends report found: expanding economies, more liquid credit, low interest rates, and growing demand from occupiers is underpinning an optimistic view of real estate. In fact, none of the 28 cities surveyed in the report is judged to be a poor investment prospect in 2016. Even Athens and Moscow scraped in this year.
That positive sentiment is echoed on a national level in a recent report by the Royal Institutional of Chartered Surveyors (RICS) which was positively euphoric about Spain, Portugal and Ireland – the ‘sick men of Europe’ during the Global Financial Crisis. The three countries have become the star performers in the eurozone recovery and this is fuelling the revival in their real estate markets, the report found.
A strong case for stocks
One of the key questions facing real estate investors in Europe is how to access product in a market that is becoming increasingly competitive due to the ongoing waves of global institutional capital hitting European shores. Speaking at the EPRA event in London, Bart Gysens, head of property research at Morgan Stanley, made a strong case for real estate stocks. Despite some apocalyptic forecasts and much waving of red flags, it’s not ‘five to midnight’ for the listed property sector, he said. ‘2016 will be less spectacular than 2015, but it will not be bad, especially for London offices.’
He conceded that the classic risk indicators are all present, from all-time-low property yields to all-time-high property deal volumes, from high levels of equity capital market and MA activity by companies to record generalist investor interest. But there is one important mitigating factor, he noted. The last three major property corrections – in 1975, 1992 and 2009 – happened after years of elevated property lending. ‘We are far from that now,’ he said. ‘Property is not hooked on credit, far from it. UK commercial real estate lending is 6% of total bank lending, much lower than it has been in the past.’
One of the key risks facing Europe’s listed real estate sector is the continuing weakness of underlying equity markets. But for stock pickers, this may well generate opportunities. As Gysens pointed out at EPRA’s London event, the London stock market points to a 5% NAV decline in the first half of 2016 which he thinks is far too bearish.
That sounds like a ‘buy’ tip for investors seeking greater liquidity in their bid to maintain their real estate exposure.
Judi Seebus
Editor in chief