Report No. 3

THE PROPERTY STOCK AND EQUITIES MARKET AT A GLANCE

Property shares and REITs couldn‘t sustain their recent upward momentum seen over the past six months. This is primarily due to two main factors. First, the rush to recover from the sharp declines in 2022 has largely subsided. Second, optimism about interest rates has been replaced to some extent by skepticism as to whether inflation has really been contained in the long term and whether the central banks might not re-adopt a more restrictive course. The ‘AVENTOS Listed Real Estate Report’ Shows which sectors still have promising growth potential or significant NAV discounts.

Stock market activity over the past six months (as of 31st March) was highly variable and very volatile. The US S&P 500 only appeared to be treading water, with a slight loss of 2.2% year-on-year – at one stage it was up by more than 10% only, for this to fall away again within a matter of weeks. The DAX, Germany‘s leading index, performed quite differently, rising by 15% and at times setting new records (max. +22%) – especially towards the end of the period under review. The causes are likely to be found not only, but also not least, in the behaviour of the new president of the USA, Donald Trump.

The performance of listed property shares and REITs was weaker in the past six months than in the previous period. The FTSE EPRA Nareit index, a widely recognized benchmark, reported a total return decline of 5.7% for North America and 12.3% for Europe.

After share prices had fallen sharply as a result of the interest rate shock in 2022/23, particularly in the property segment, the second half of 2023 and 2024 were characterised by a price recovery, which now appears to have come to a standstill. This development was primarily driven by interest rate trends. The ECB has already cut its key interest rates six times since the summer of 2024. The US Federal Reserve has also eased its monetary policy several times since then, albeit to a lesser extent.

This interest rate optimism has now been significantly dampened, not least because the planned customs and fiscal policy in the USA and parts of Europe is associated with considerable inflation risks. This could, in turn, prompt the central banks to discontinue their current course of interest rate cuts or even revert to rising interest rates. It remains to be seen whether this scenario will actually materialise – the US Government will be keen to prevent interest rates from rising – but it is clearly not considered entirely unrealistic.

Many companies are currently back to trading below NAV. The reason for this is likely to be catch-up effects in the valuation of property portfolios, which generally take place with a time delay. Stock markets have immediately reflected interest rate cuts over the past year, while the NAVs only reflect the change in value after a few months. Furthermore, property shares are already pricing in the latest contradictory developments. The strong NAV spread movements since the previous report might well be largely attributable to These two intensifying effects.

It is remarkable that two US prison operators, The GEO Group (+124%) and CoreCivic (+62%), are among the outperformers of the past six months as of 31st March. The markets expect the new US government‘s agenda to result in a significant tightening of migration policy, a move from which the two REITs would Benefit due to the increase in deportation detention cases. The list of half-year winners also includes Playa Hotels & Resorts (+67%), the hotel owner and operator officially trading in the Netherlands but listed on the Nasdaq and holding a hotel portfolio in the Caribbean and Mexico – its share price increase is primarily due to the planned takeover by Hyatt. Among the losers this time around was the Swedish community developer, SBB (Samhällsbyggnadsbolaget i Norden, -55%), which remained one of the outperformers six months ago. SBB has extremely high leverage and its shares are correspondingly sensitive to changes in the economic outlook. Innovative Industrial Properties, which operates in the US cannabis business, suffered even greater losses (-57%). Furthermore, among the three companies with the largest losses is the externally-managed US hotel and net lease title, Service Properties Trust (-44%). In particular, ever since the COVID-19 crisis the performance of its hotel portfolio has lagged behind that of other hotel providers. In the case of Service Properties Trust, excessive leverage also contributed to the very negative performance.

Takeovers and transactions also took place again in autumn and winter of 2024/25, although overall transaction activity remains at a low level. The largest transactions were the takeover and delisting of the US retail investor, Retail Opportunity Investments Corp., for €3.7 bn by Blackstone and the takeover of the co-working provider, Industrious, by CBRE for just under €400 m. A further factor worth noting – although itactually lies outside the coverage of this report – is the EUR 1.2 b illion IPO of the Australian data centre, REIT DigiCo Infrastructure, underscoring the ongoing global boom in data centers.

IMPLIED CAP RATES

Implied cap rates, i.e. the ratio of net operating income to market capitalisation plus net debt, exhibited the following in the traditional office, retail, residential and logistics segments over the past six months:

• In Europe, with the exception of the office segment, they largely declined marginally in line the general interest rate trend.

• Whereas in North America they showed a slight increase in yields or an almost lateral movement.

Further observations:

• The increase in yields on European office stocks since the end of the 2023 financial year is due to price declines caused by the continued subdued sentiment in this segment. Structural concerns persist in the market regarding this type of utilization, although they have not yet significantly impacted long-term rental income. It is increasingly apparent that market dynamics are differentiating strong performers from weaker ones.

• The long-term rise in yields in the office segment is also striking in North America. There, and in contrast to Europe, the implied cap rates are already significantly higher than for other types of utilisation. Logistics and residential property, on the other hand, have remained stable, albeit at a significantly higher level than during the low-interest phase. The low yield spread to the risk-free interest rate led to a significantly stronger rise in yields than for segments that were already trading
at considerable yield premiums.

• The slight decline in yields for European residential property companies could indicate a recovery in the segment. Some players in the segment (e.g. Vonovia) came under pressure due to increased leverage in the wake of the interest rate hikes in 2022 and 2023 and subsequently suffered significant share price corrections.

Source: ACM; Fiskal years 2020-2024, 2025 as of March 31, 2025.

NAV-SPREAD

Since the previous edition of the „AVENTOS Real Estate Report“, the NAV spread of most sub-segments has moved in the opposite direction, i.e. towards discounts. This is surprising given that the ‘spread gap’ had actually been slowly closing again. In North America, the premium has fallen from 9% to 3%, while Europe has even exhibited a discount of 22%.

In both major markets, the high discount in the hotel sector remains striking, especially in North America. The high premium outlier is the North American medical sector, whereby the special effect of the large and extremely highly priced REIT, Welltower, is playing a decisive role. Another special effect is responsible for the major change in the sector spread compared to the previous report in the European logistics segment. In comparison to the previous report, the current version includes data for the Dutch company, CTP, and France’s Argan, which are trading at significant Discounts. Without their influence, the corresponding spread value would still be in positive figures (5.5%).

Specifically, at the end of the third quarter, the average NAV spread weighted by market capitalisation, depending on the type of utilisation, was as follows:

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

KEY PROPERTY INDUSTRY FIGURES

The trends in Implied Cap Rates and the NAV spread can also be partly explained by key property Industry figures. It would therefore seem logical to look at the companies’ occupancy and financing rates – even if the methods and periods under consideration differ in some cases.

Occupancy rates

The trends in the rental rates of listed property companies show some divergences. Logistics is declining slightly in North America while it is almost stable in Europe. The other segments have remained predominantly stable, all consistently above 90%.

However, the office markets stand out as a major exception. The relatively high vacancy rate in Europe is again exceeded by North America, where stabilization is now evident, whereas Europe shows a clear decline in occupancy rates. Whichever way you look at it: offices currently present the greatest challenge among the major utilization types.

Source: S&P Capital IQ Pro; fiscal year-end 2023 and 2024.

LEVERAGE

The leverage ratio – that is, the debt capital in relation to the company value (market capitalisation plus debt, less liquid assets) – also shows a differentiated picture. Whereas North America in 2024 was predominantly characterised by falling leverage (partly due to the increase in share prices), rising values are now to be seen again, particularly in the office and retail segments. In Europe, on the other hand, leverage values rose slightly in the course of 2024, except in the retail segment, and have remained relatively stable ever since. In general, leverage is noticeably higher in Europe than in North America.

However, a glance at the balance sheets of the companies in question shows that the recent increases in leverage are rarely due to net new borrowing, but rather to the companies‘ price corrections. The slight increase in the leverage value in the European industrial segment since 2023, albeit at low levels, is likely to be related to the increase in the leverage of the Belgian REIT, Warehouses De Pauw, during this period. That said, with a market leverage of less than 40%, the REIT is not in a problematic debt situation.

Source: ACM; fiscal years 2020–2024, 2025 as of March 31, 2025 (leverage) and March 31, 2025 (market cap).

ACM SEKTOR MOMENTUM

Compared to the previous editions of the „AVENTOS Listed Real Estate Report“, the current „ACM Sector Momentum“ indicator shows that the individual utilisation types have moved closer together again – and that is the case on both sides of the Atlantic.

The hotel segment is once again showing conspicuously negative sector momentum values, although the corona-related special effects have visibly levelled off. In both North America and Europe, the residential and office utilisation types stand out as positive. This means that they are currently valued relatively highly in a historical comparison of utilisation types and measured against the Implied Cap Rate.

The high momentum value of the retail segment continues to reflect the structural recovery of the (remaining) sustainable business models. Compared to previous years, retail shares are currently valued rather highly. The same applies to data centres, even if for different reasons. The upswing in fundamentals resulting from the AI boom continues apace, although the two industry leaders, Digital Realty and Equinix, have seen their share prices fall. The initial excitement following the first media discussion of the DeepSeek large language model at the end of January 2025 has now largely subsided. The negative impact of chatbots on the data centre capacities required worldwide is likely to have been significantly overestimated initially. In this respect, the momentum in the data centre segment is currently still the second highest on the North American continent.

The „ACM Sector Momentum“ indicator at the end of the first quarter of 2025 unfolds as follows for the various sectors:¹

CONCLUSION

Overall, NAV spreads have widened again in most sub-segments. The volatile political environment on both sides of the Atlantic is expected to lead to increased volatility in the property stock market going forward, potentially influencing further sector winners and losers.

To date, prison REITs have been among the biggest winners operating within a more restrictive Migration policy in the USA. On the other hand, logistics properties in Germany and Europe could potentially Benefit from the infrastructure program proposed by the likely new German coalition government.

The consolidation and recovery of the retail segment provides hope for the office sector. After a similarly lengthy consolidation phase, office portfolio holders should also emerge stronger from the current crisis.

The positive sentiment exhibited in the data centre segment continues despite share price setbacks, as fundamentals remain extremly positive. The widespread enthusiasm during the pandemic years in the logistics and self-storage sectors is now over and the momentum values for both sectors are currently negative.

Now that the price increases of the previous months have largely levelled off and there have been corrections in some cases, valuations no longer appear to be high when compared to historical data, even in relation to the rest of the stock market environment. However, the interest rate fantasy has also largely disappeared and with it the hope of further interest-driven price rises.

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 guarantee as to the adequacy, correctness, accuracy or completeness of the information contained herein (including, but not limited to, information originating from third parties).

Furthermore, AVENTOS Capital Markets GmbH & Co. KG expressly rejects any responsibility or liability for, and assumes no responsibility to update or correct, the information contained in this report.

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