The growing value in European property was underlined after the biggest US real estate investment trust (Reit), Simon Property Group, completed its acquisition of a 28.7% stake in Klépierre, a French property company, for an estimated $2 billion (£1.2 billion).
Simon Property paid a 20% premium for the equity from the French bank BNP Paribas, which owned around a quarter of the Paris-based Reit.
The deal highlights a number of reasons why listed European property companies have become an increasingly attractive proposal for the world’s biggest investors.
‘It is interesting that the most respected property company in the world has identified value in European Reits. Even though Simon Property bought it at a premium, it still paid a 10% discount for the underlying asset values,’ said Alex Ross, fund manager at Premier Funds.
‘Today, there is no better opportunity to pick up quoted European real estate stocks because they are trading at discounts to underlying value of 10% to 30%. You are not just buying assets at a good discount, you are buying the best assets.’
Profits for bargain hunters
Ross’s Premier Pan European Property Share fund has returned 60.52% over a three-year period compared with the FTSE AW Europe (Dev)/Real Estate Invest & Svcs index’s -9.57% over the same period.
He says in terms of value on the Continent, the discounts are even wider in southern Europe and at the smaller end of the market.
In December 2011 and January this year, Ross bought the Italian property company Beni Stabili at a 70% discount to net asset value (NAV).
‘It only owns prime assets in the north of Italy and is a highly reliable income stream. Even though the price has gone up significantly since we bought it, the shares are still trading at a 57% discount,’ he said.
Good quality Reits with prime assets were caught up badly in the market sell-off in the second half of last year, when the eurozone debt crisis triggered many overseas investors to pull their money out of the troubled region.
Today, investors don’t need to go to Greece or Portugal for the chance to pick up a bargain when they can get exposure to Parisian offices or German residential property at discounts of up to 40%.
As an example, Ross pointed to French Reit Icade, which was trading at a 40% discount to NAV when he bought it.
‘Those assets have actually been going up in value in the second half of last year as they are some of the very best quality real estate in Paris,’ he said.
‘This is still very attractive for institutional investors and sovereign wealth funds. While the rerating of this stock is in progress, it has still got some way to go and it doesn’t happen overnight.’
Banks liquidate property assets
Another argument in favour of listed real estate firms is major European banks deleveraging their balance sheets, which has seen many trying to reduce their property exposure.
While this is a problem for many property funds, which are struggling to find willing lenders, it presents an opportunity for Reits, which can go straight to the bond market for cheap financing.
This week, Unibail-Rodamco, one of Europe’s biggest listed commercial property companies, raised €750 million in a bond issue paying a fixed 3% interest rate for the next seven years.
Testifying to the sector’s popularity, the bond was four times oversubscribed.‘The deleveraging we’re seeing in banks is playing into the hands of the quoted firms as they can quickly raise money to do deals. Just look at BNP selling some half its stake in Klépierre,’ Ross said. ‘The European scene has really come to life in the past week or so.’