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Low interest rates and weak currency boost European Reits

Low interest rates and weak currency boost European Reits

Real estate investment trusts (Reits) are being tipped to outperform as the devaluation of the euro and the alpha generated by smaller European property companies boost the sector.

Pan-European property funds in their many guises have endured a difficult run, slumping by a typical 44.6% over the past three years, according to Lipper data.

But as the woes in southern Europe result in a devaluation of the euro, enhanced returns are expected from northern European exporters as a result, which should push up demand for occupational commercial space.

‘We are on the cusp of a more traditional real estate cycle, one that is not driven by weight of money or targeting property, but by the true real estate fundamental of what is the outlook for the income on a particular property,’ said Alex Ross (pictured), manager of the £35.2 million Premier Pan-European Property Share fund.

One beneficiary of the expected stock, or property, pickers’ market could be German industrial real estate, with increased demand for manufacturing space being reported by local managers. Core European property more generally is also expected to offer value.

‘Core European property values lag the UK by six to nine months and we are now seeing institutional investors and pension funds targeting prime European real estate, given the highly attractive income it currently offers relative to other asset classes,’ Ross said. 

‘Many of the major European Reits have recently taken advantage of expectations of low interest rates for longer and hedged their debt costs over the duration of the next property cycle. This is one of the key reasons why core European property makes sense right now – an attractive high yield against very low, and now largely fixed, interest costs.’

From around the fourth quarter of 2010, property yields are expected to be unchanged as demand for sites will be met as banks deleverage. This means returns from property will be heavily dependent on the individual sites. Asset managers that are able to ramp up income should do well in this environment. 

Alternatively, key markets poised for rental growth – such as those in Paris, Scandinavia, central London and Germany – are likely to pay off in terms of net asset value outperformance as well.

However, Reits exposed to both Europe and the UK will have a lot of catching up to do despite the more favourable environment being anticipated. Over the past three years, Ross’s Premier fund, which invests in securities and shares of property companies and collective investment schemes, felly by 22.4%. 

This is versus a fall of 12.72% in the FTSE EPRA/NAREIT index and a return of -10.86% on the FTSE AW Europe (Dev)/Real Estate Invest & Svcs TR. 

Elsewhere, Swip’s £2.2 billion Property Trust, managed by Citywire A-rated Gerry Ferguson, fared better over the same stretch, although it still lost 14.37%. The IPD UK Property Monthly TR Index dropped 17.69%, while the Jones Lang LaSalle UK Property TR fell -33.78% over the same period.

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Alex Ross
Alex Ross
1/2 in Property - European Equity (Performance over 3 years) Average Total Return: 43.32%
Gerry Ferguson
Gerry Ferguson
7/17 in Property - UK Physical (Performance over 3 years) Average Total Return: 17.00%
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