Report No. 2

THE REAL ESTATE STOCK MARKET AND THE EQUITIES MARKET AT A GLANCE

In the past six months listed property companies and REITs have displayed an outperformance on the stock markets compared to general equities markets. This is primarily the result of a recovery which also has its roots in the development of interest rates. If one considers the future potential for further recovery, it is necessary to differentiate, however. The AVENTOS Listed Real Estate Report provides a market overview of a stock segment which encompasses about 1,200 securities and a market capitalisation of approx. two trillion euros in the OECD countries alone.

In the six months through to 30 September the stock markets have essentially been able to maintain their upward trend, albeit at a reduced pace. The S&P 500 rose by 10% and the German benchmark index, the DAX, by about 6%. In some cases new record highs were reached once again. In the summer months, the trend was less consistent and was repeatedly characterized by intermittent corrections. For example, the increase in base rates by the Bank of Japan at the beginning of August triggered worries about so-called carry trades, leading to substantial corrections, especially in the highly rated tech segment.

In contrast, listed property companies and REITs displayed a considerably more pronounced recovery: by the end of September, they had returned 16% in North America and 13% in Europe within the last six months (FTSE EPRA Nareit North America and Europe, respectively). This is essentially due to the development of interest rates: the increase in rates from the summer of 2022 onwards initially led to disproportionately high share price losses. Moderate decreases in rates (on both sides of the Atlantic by 50 basis points so far) have brought about a slight upturn.

However, not every sector seems to have the same recovery potential. It is considerably less pronounced in the data centre segment. Prices here are already relatively high in a historical comparison and in a comparison with NAV. In contrast, the office segment - particularly in North America - shows NAV Discounts that recently implied relatively low valuations. In this respect the ‘bifurcation’ trend for liquidity which had already been described in the previous issue of the AVENTOS Listed Real Estate Report can still be observed, with high-quality space in excellent locations continuing to perform much better than less competitive properties. This is also reflected in individual companies’ price development: thus the stock price of Derwent
London, a specialist for high-quality office properties in the British capital, displayed an outperformance over the benchmark index, and also when compared to companies with a less pronounced orientation to Class A properties.

As of the end of September outperformers in the investment universe we have monitored over the past six months include Swedish residential and community developer SBB (Samhällsbyggnadsbolaget i Norden, +123%), as well as the American health care specialist American Healthcare REIT (+92%), which had only been listed on the NYSE as recently as February 2024, and the Italian shopping centre REIT Immobiliare Grande  Distribuzione (+77%), while Community Healthcare Trust Inc. (-26%) and Service Properties Trust (-25%) suffered the biggest losses.

Moreover, in the spring and summer of 2024 a number of isolated take-overs and transactions were observed, while transaction activity on the real estate markets remained largely subdued. Of particular note is the IPO of Lineage in July. With a volume of 4.4 billion US dollars it has been the biggest IPO to date this year. The American specialist for refrigerated warehouses was consequently valued at more than 18 billion dollars. Only two other transactions had volumes which were just over a billion euros: the previously announced purchase of the British REIT Balanced Commercial Property Trust by a distressed opportunities fund of Starwood Capital and the take-over offer already submitted by Hines and Grupo Lar in July for the Spanish REIT Lar España Real Estate.

IMPLIED CAP RATES

The implied cap rates, the ratio of the net operating income to market capitalisation plus net debt, have declined in the past six months in some sub-segments, and especially in North America, for the first time since 2021. The main reason for this lies in the recovery in stock prices observed across the market as a whole, which was probably caused not least of all by the decrease in interest rates. There are, however, some exceptions.

• In North America implied cap rates saw a downward shift across segments. While they are still at high
levels in the office segment, the decline points to a gradual recovery for office property stock prices. The
fear of the effects of the home office trend appears to have given way to more precise differentiation.

• The decline in North America was greatest for retail properties. this is remarkable because their
valuations in the previous year had displayed the largest increase.

• One striking exception is formed by logistics in North America, where the implied cap rates bucked
the trend and rose slightly. The boom experienced by the sector in the wake of the COVID pande-
mic has tailed off considerably in the meantime and this has been reflected accordingly in the
valuations.

• The analysis in Europe is somewhat more differentiated: here the implied cap rates increased slight-
ly in the office sector and quite substantially in the logistics segment. Only the retail sector showed a
slight downturn.

Source: ACM; Fiscal years 2019–2023, 2024 as of 09/30/2024.

NAV-SPREAD

Since 29 March 2024, the cut-off date for the previous issue of the AVENTOS Real Estate Report, the NAV spread has changed substantially in both North America and Europe: while Europe can still boast a NAV discount, this has decreased from 7.7% to 2.4%, however. Listed real estate companies in North America recorded a NAV premium of 8.9% (Spring Report: discount of 2.5%).

The decrease in the NAV discount in the office segment was particularly sharp. Although there are still discounts on both sides of the Atlantic, these have declined by about 14 percentage points (North America) and 24 percentage points (Europe), respectively. The large discounts in the North American hotel segment and in the European retail segment are particularly striking. It would appear that here the stock markets are still very cautious regarding the future development of these usage types. Conversely, logistics in Europe and medical in North America have historically performed very well on the stock markets to date, with both displaying large NAV premiums. In the case of the US medical sector the premium is dominated by the strong stock price performance of Welltower, by far the sector’s largest actor.

At the end of the third quarter, the average NAV spread weighted by market capitalisation for the respective usage types were:

Source: Own illustration based on data from S&P Capital IQ Pro.

REAL ESTATE INDUSTRY KEY RATIOS

The stated trends for the implied cap rates and the NAV spread can in part also be explained by key ratios for the real estate industry, which is why it is worth taking a look at the current occupancy rates and financing ratios (leverage) – even if these are in part based on diverging methods, yet which only have a limited impact on the overall picture.

Occupancy rates

As many companies only publish occupancy rates on an annual basis, at this juncture it is only possible to point to the average rates from 2023 so as to guarantee any comparability. For this reason this ratio is only published in our AVENTOS Listed Real Estate Report in the first quarter of each year. Fundamentally, occupancy rates were generally high in most sub-markets in 2023 (approx. 95%). One conspicuous exception is the office market in North America, where the occupancy rate last year was lower than 90%.

Source: S&P Global Market Intelligence; Fiscal yaer-end 2022 and 2023.

LEVERAGE

The charts show debt as a ratio of corporate value (market capitalisation plus debt less cash and cash equivalents). Since the last AVENTOS Listed Real Estate Report the leverage has been observed to decline in most of the segments. This generally reflects the recovery in stock prices seen in recent months. Some companies have taken relatively high levels of interest rates as a cause for using existing liquidity and new liquidity inflows to lower their leverage.

This decline was greatest in the North American residential segment, as a result of the arithmetical effect from the positive development of prices. One exception here is once again the logistics segment, in both North America and Europe. In addition to the development of prices, in the case of some European logistics companies this may be explained by the raising of borrowed capital. The leverage in this usage type is also at the lowest level, however, something which is due not least of all to the relatively high stock prices.

Source: ACM; Fiscal years 2019–2023, 2024 as of 06/30/2024.

ACM SEKTOR MOMENTUM

The current ‘ACM Sector Momentum’ indicator continues to show the relatively low valuation – from a historical perspective – in the hotel sector, which is primarily due to the special effect resulting from the corona virus pandemic, however (see Conclusion).

 On the whole the majority of stock prices have recovered. The relative momentum in many of the sectors has risen slightly. Individual segments have also declined, however, potentially opening up buy-in opportunities, for logistics in North America for example. Offices in North America, in contrast, have seen a significant upturn since the last ACM sector momentum.

Fundamentally, the European net lease sector currently comprises the company LondonMetric Property, which only recently shifted its focus to net lease properties. The interpretation of the momentum value of the sector is thus difficult at the current point in time.

The ACM sector momentum at the end of the third quarter of 2024 is as follows for the various sectors:¹

CONCLUSION:

Retail real estate on both sides of the Atlantic continues to display a positive momentum. In terms of the historical implied cap rate, it has a comparatively high valuation. After years of comparatively low attention, retail assets have recently become more popular again with institutional investors. To a certain extent, the development of the sector mirrors that of the logistics sector, which has benefited greatly from the effects of the COVID crisis. The general overestimation of the negative impact of e-commerce on the retail sector in the course of the pandemic is currently being corrected to a certain extent. Moreover, North American data centres stand out positively above all, but they have a high NAV premium, however, and can thus currently be described as having a high valuation.

In both Europe and North America hotels again have the largest negative momentum. In the meantime they have fallen below their previous levels and slipped into minus territory. In this respect a special effect has to be taken into account, however: the substantial slumps in earnings in the wake of the coronavirus pandemic led to extremely low implied cap rates in 2020 and 2021, which somewhat distorts the historical comparison. This effect has actually been reinforced by the strong upturn in earnings in the hotel segment. It also shows, however: when viewed against the last AVENTOS Sector Momentum the earnings situation in the hotel sector has developed disproportionally well compared to the development of stock prices. 

In comparison to the last sector momentum the office valuations in North America and Europe have risen again. In contrast, a relatively large discrepancy has been seen in the industrial segment: one reason for this could well be the fact that the valuation of the sector during the COVID pandemic experienced an extraordinary yield compression following the enormous acceleration in the e-commerce trend. This trend might now revert to a normal level.

DISCLAIMER

The information in this report is for information purposes only and does not constitute investment advice or a recommendation, offer or solicitation to buy or sell securities or other financial instruments. Past performance shown in this report is not an indicator of future results.

Economic and market information contained in this document has been obtained from publicly available sources prepared by third parties. AVENTOS Capital Markets GmbH & Co. KG assumes no responsibility for the accuracy or completeness of this information.

AVENTOS Capital Markets GmbH & Co. KG makes no representation as to the adequacy, correctness, accuracy or completeness of the information contained herein (including, but not limited to, information obtained from third parties). Furthermore, AVENTOS Capital Markets GmbH & Co. KG expressly disclaims any responsibility or liability and assumes no responsibility for updating or correcting the information contained in this report.

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