Real estate stocks reflect Eurozone fears, says Kempen

Listed real estate companies located in peripheral eurozone countries, or those with sizeable investment exposure to assets in those markets, are being punished by investors, with their stock values reflecting fears the currency bloc may disintegrate due to the sovereign debt crisis.

Dick Boer, an executive director at real estate specialist bank Kempen, presented results of a research project at the annual conference in London of the European Public Real Estate Association.

“Over the last few months we’ve seen anastonishing decoupling between the valuations of those real estate firms who are exposed to the fullbrunt of the sovereign debt crisis, and so also fears that the Eurozone may disintegrate, and those who arelargely sheltered from the storm,” he noted.

Kempen examined the performance of Europe’s major listed real estate companies either located in four of the peripheral countries in the centre of the sovereign debt crisis storm: Portugal; Italy; Greece and Spain (PIGS), or with a minimum of 20% of the value of their property portfolios in those markets, since the beginning of June.

The research then compared these companies with real estate stocks with limited exposure to PIGS in the rest of the Eurozone; the UK; Sweden and Switzerland. In terms of both total investment return on the shares and the discount to which the stocks have been trading relative to the net asset value (NAV) of their underlying real estate portfolios, there is a striking disparity between the two groups.

A eurozone index of real estate stocks with limited PIGS exposure showed total returns of -17% since the start of June, compared with -35% for listed Italian property firm BeniStabili and -38% for Spain’s Colonial.

The average discount to NAV for companies located in PIGS was 48%, and for those with a sizable exposure to these markets, 22%. Discounts to NAV for European firms outside this group were roughly half or a quarter in comparison, averaging around 11% to 13% for non-PIGS eurozone, the UK and Sweden.

Kempen said the varying impact of the sovereign debt crisis on European real estate stocks could be seen clearly by comparing two similar French companies: retail/office-focused firm Unibail-Rodamco, Europe’s largest quoted property company, and retail property investor Klépierre.

Klépierre stock has been trading around a 28% discount to NAV, with 12% of the value of the company’s shopping centre portfolio located in Italy and Greece and 9% in Spain and Portugal. In contrast, Unibail-Rodamco’s NAV discount is about 11%, with only 9% of its portfolio of shopping centres in Spain and no exposure in other peripheral eurozone markets.

Liquid real estate equities may be indicating future price moves in the far less liquid underlying physical property markets months beforehand, Boer said. Investors appear to be selling down those stocks with the greatest exposure to a ‘worst case scenario’ in the crisis, such as peripheral countries crashing out of the eurozone.

This might mean, for example, Spanish shopping centres and any debt attached to them being valued in steeply discounted ‘old euros,’ relative to comparable real estate assets priced in a separate new currency bloc centred around Germany.

“If the apocalyptic scenario now being priced into European real estate stocks with an exposure to the eurozone’s peripheral countries proves to be too pessimistic, then the current situation could also represent a great investment opportunity as these companies bounce back.”


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