Property stocks provide some relief amid market downturn

European listed real estate stocks have performed well amid the recent market turbulence, with the exception of UK property stocks which were sent tumbling this week on growing fears of a Brexit.

But although market watchers see little room for share prices increases in the near future, real estate stocks are helping to shore up investors' portfolios against further hits on the broader equities market.

The following example illustrates the point well. Last summer there was no doubt at all among analysts whose shareholders would stand to gain the most when Zurich-based industrial holding Conzzeta floated its residential real estate arm Plazza on the Swiss Stock Exchangein a bid to strengthen its core business.

The spin-off arguably gave Conzetta more focus as the listed parent group of a diverse range of companies, including outdoor brand Mammut and plant construction specialist Bystronic.

Thumbs up
While it was thumbs up across the board for Conzetta, expectations were not so high for Plazza, which was valued at the time of the IPO at CHF460 mln (€438 mln). Swiss financial magazine Cash summarized the sentiment accordingly at the time: 'The spin-off is positive for Conzetta's shareholders, but the outlook for Plazza is more cautious.'

Fast-forward seven months into February of this year and the picture looks quite different. Following the slump on global stockmarkets, Conzzeta's shares have plunged more than 20% below their 2015 peak while Plazza's shares have been trading at a discount of less than 8% below their first market quotation.

Today, experts see the disparate performance of Conzzeta and Plazza as a prime example that European real estate stocks remain a good play for investors seeking to shore up their equities portfolios against the vagaries of the stock market. And that despite their near-record valuations following a bull run that has lasted for more than six years.

'Since property stocks are backed by real assets, they act like a buoy in a rough sea when markets head south,' commented Günter Vornholz, Professor of real estate economics at the EBZ Business School in Bochum, Germany.

According to data generated by the European Public Real Estate Association (EPRA), the European property stocks index FTSE EPRA NAREIT Eurozone shed 7.1% in the three months following the start of the downturn on the stock markets in mid-November last year. During the same time, the Eurostoxx 50 tumbled by 15.64% while the DAX, Germany's leading stock market index, dropped by 13.7%.

However, not all real estate stocks have been faring equally well. UK property stocks have taken the biggest hit, fuelled by fears that a Brexit would force companies to move jobs from the UK to Continental Europe which in turn would cause office and residential vacancy rates to rise and valuations to fall.

Brexit will have an impact
Should the UK leave the EU, there will be a 'significant impact', with about a fifth of the jobs in corporate and investment banking leaking away from London, warned Stuart Gulliver, CEO of Britain's largest bank HSBC.

But the overall effect on the UK market may be small. 'Office vacancy rates are at a 14-year-low, standing at only 3.4% in the West End,' noted James Roberts, Chief Economist at Knight Frank. He added that demand is still on the rise, driven by creative and technical services.

As a result, some analysts believe that now may in fact be a good time to reinvest in UK property stocks. UK property stocks are currently trading around 22% below net asset value, according to Thomas Veraguth, Head CIO Swiss & Global Real Estate Strategy at Zurich-based UBS. 'This is an excessive discount compared to the valuation of property shares in Continental Europe, the US and even some listed markets in Asia and will likely lead to a rise in share prices.'

On the other side of the spectrum, German property stocks, bolstered by a resilient economy at home, have suffered only marginal losses. The German Real Estate Stock Index DIMAX, compiled by Stuttgart- based private bank Ellwanger & Geiger, has fallen by only 5.96% since mid-November last year. Players that have been hit hardest in the recent downturn include developers like Frankfurt-based DIC Asset whose stock has shed more than 10%.

Meanwhile shares of property portfolio holders like shopping centre operator Deutsche Euroshop and residential companies like Deutsche Wohnen, LEG Immobilien and Vonovia have experienced hardly any losses at all.

Steady rental income
'Shares of property portfolio holders are extremely well buffered since they provide constant dividends generated from steady rental income,' said real estate analyst Stefan Mitropoulos of Landesbank Hesse-Thuringia in Frankfurt.

But although property stocks have performed relatively well during the recent downturn, experts do not see much room for further increases in the share prices of Continental European property stocks. And that despite the fact that demand from tenants for office and retail space in most countries is on the rise, which should lift rents and possibly lead to further growth in dividends.

'Across the board Continental European property stocks will continue to offer attractive dividend yields,' predicted Philippe Kaufmann, head of global real estate research at Credit Suisse. 'But valuations are so stretched that there is little room for additional growth in share prices.'

Richard Haimann
Finance & Markets Editor