Author - Mario Krismer
Investing in real estate, also known as "concrete gold," has long been considered a safe investment. However, rising interest rates are one reason why rental yields are far less attractive today than they were a year ago. A possible alternative could be to invest in listed developers and real estate companies, some of whose shares are trading more than 50% below their highs. But does this raise the question of whether an end to the downward trend is really in sight?
The Stoxx 600 Real Estate Index (European Real Estate Sector Index) has had seven consecutive years of underperformance relative to the main Stoxx 600 index through 2022, and things don't look much better for 2023 so far. The performance of the main index increased +7.9% year-to-date through September 28, 2023, while the Real Estate Sector Index declined -6.3%. European real estate companies face significant risks, including rapid interest rate hikes and pressure on property prices. Planned refurbishment measures to improve environmental performance are also putting them under pressure.
Debt higher in Europe
As a result of these factors, European real estate stocks are valued lower on average than would correspond to their actual value. This particularly affects companies with a high proportion of debt, especially French, German and Nordic companies. The higher a company's debt, the greater the price discount. As a result, these companies are currently trying to reduce their debt by cutting costs, suspending dividends, selling real estate, etc., in order to maintain their credit rating, for example, and compensate for higher financing costs. In our view, this process is not yet complete, and it will take a convincing halt to interest rate hikes for real estate stocks in Europe to recover and possibly outperform the main index. Healthy rental growth could also slow the downward trend. However, the market does not currently expect rates to be cut before September 2024.
Rising vacancy rates in the U.S.
In the USA, the situation is not quite so bleak. Although interest rate cuts are not expected here either before the summer of 2024, many American real estate companies are less highly indebted than their European counterparts. In 2021, the S&P 500 Real Estate Index (U.S. real estate sector index) actually outperformed the broad S&P 500 (index of the 500 largest publicly traded U.S. companies) (+56.9% in EUR vs. +38.1% in EUR). So far in 2023, the performance of the main index is +14.9% (in EUR) versus -4.9% (in EUR) for the US real estate equity sector. Nevertheless, we are critical of US real estate equities, given declining rental growth and rising vacancy rates (as of Q2/23).
In our European equity funds, we currently have real estate equities with a 0% weighting, compared to a benchmark index weighting of 0.77%. In our U.S. equity funds, we currently have a 1.7% weighting to real estate equities, compared to a benchmark index weighting of 2.3%. In any case, when selecting real estate stocks, close attention should be paid to the leverage ratio, geographic location and type of real estate (warehouses, offices, apartments, shopping centers, etc.) covered by the equity investment.
This information is intended to provide a general overview of current market data and market developments, as well as Kathrein's market opinion, and does not contain any direct or indirect recommendation for a particular investment strategy in the sense of a financial analysis, or a recommendation to buy or sell financial instruments.
When investing in securities, price fluctuations due to market changes are possible at any time. Analysts' opinions, market opinions Data of the performance with reference to the past do not allow reliable conclusions to be drawn about future results.