German listed residential landlords, particularly those that have been relying more on sales than rental income, will have a difficult time this year, according to Rogier Quirijns, head of European Real Estate at US-based investment manager Cohen & Steers, which manages roughly $80 bn of assets across the globe.
Quirijns said 2022 was a ‘horrible’ year for European listed real estate, which has underperformed in both the US and Asia on a relative basis. ‘I believe the European business model is mostly too highly geared on a net debt to EBITDA base. In the US, balance sheets are more conservatively financed.’
The German listed residential sector, as well as the Swedish listed property industry have started the new year with relatively high leverage and too much reliance on property sales to reduce leverage. ‘When we look at earnings, we need to ask ourselves, are these from rents or are they from sales? In the case of the German residential sector a major part of earnings has been from sales and now that the market is slowing there is growing pressure to repair the balance sheets via capital raises, possible defensive rights issues and dividend cuts.’
Similarly, the Swedish listed property sector has enjoyed the boom showing high annualized returns until it hit the quantitative tightening headwind. ‘Landlords need to fix their balance sheets and this will take some time. The main question is what interest rates will do next 12 to 24 months,’ added Quirijns.
Moving towards opportunities in the listed sector, the bold non-consensus for 2023 is retail, he added.
Quirijns: ‘Investors have hated retail during the pandemic – but even before the pandemic and the sector got relatively attractive on valuation. Also during the pandemic, some retail assets proved to be quite resilient and demonstrated that there is a place for physical retail next to ecommerce. Right now, retail companies are offering relatively high & sustainable dividend yields compared to other property companies and I think this is attractive.’
