'Gentle' recovery looms for listed real estate sector

After being in the dumps for four years, the European listed real estate sector appears to be on track for a gentle recovery in 2013, attendees at the EPRA Insight event in Amsterdam heard in late January.

In the past year, a growing number of UK and European listed real estate companies have succeeded in issuing corporate bonds as an alternative source of debt financing at a very low cost, noted Bart Gysens, analyst at US investment bank Morgan Stanley.

'A lot changed in 2012,' Gysens noted. 'Unibail Rodamco and British Land were able to achieve extraordinarily cheap financing last year...Large caps are leading the way.'

The trend is here to stay as banks continue to reduce their exposure to real estate and retrench to domestic markets, he added. Moreover, new lenders like insurers are entering the market at a 'glacial' pace and CMBS does not look like coming back at all.

Gysens said current levels of BBB corporate bond yields offer an 'exciting' prospect for property valuations and added that the market suggests there may be a chance of NAV growth in the first half of this year. 'We think as a house that property values are going to start rising this year.'

While the sector overall has been performing quite well, a number of risks remain, Gysens warned. If recessionary pressures were to ease in 2013, equities investors may rotate out of defensive stocks such as property and into more cyclical equities, he said.

He also warned against 'too much de-gearing'. 'It's like closing the stable door after the horse has bolted; we see some justification for a natural process of de-gearing as values rise.'

Gysens also expects the polarisation between southern Europe, CEE and the Benelux countries to continue due to the weakened state of banks in these regions, but said prime real estate would not be affected. Another major risk facing the sector is the impact of ecommerce, he added. '‘This could be potentially painful.'