Weaker investor sentiment and tightening financial markets are changing the outlook for real estate players in the EMEA region, according to new research from Moody's.
Said Moody's: 'Under our base case, the credit implications of the Russia-Ukraine conflict will vary across subsectors, with limited direct property ownership exposure to Russia or Ukraine.
'The main risks are rising interest rates and deteriorating investor sentiment across Europe, which would weaken property value and debt-to-asset ratios.
'Property values are at risk of correction as interest rates increase.'
The report noted that the premium of property yields over benchmark government bonds, especially in Western Europe, remains one of the supporting factors for rising property values, given the relative attractiveness of property investments.
However, as benchmark rates have begun to rise this yield gap has started to compress. This makes property values — and as a result, debt-to-asset ratios — more vulnerable to deterioration.
Meanwhile, as rising costs for energy, food and other commodities, which the pandemic has exacerbated, dampen consumer confidence and purchasing power, operational assets which depend on these metrics could suffer.
'Landlords with retail assets with a larger share of discretionary retail tenants are more sensitive to consumer sentiment and so more at risk. Logistics assets will continue to outperform and we expect demand to remain solid for residential property.
'Tenants' scrutiny of leasing decisions in light of slowing economic growth may curb office rental growth, while inflation indexation of rents will serve as mitigant,' the report said.
Looking at the territories most affected, CEE property values are deemed to be 'more vulnerable' according to the report given the region's rising interest rates.
Only one company rated by Moody's, Atrium European Real Estate (Ba3 negative) has meaningful assets in Russia, but several companies have exposure to markets bordering these countries.
'We do not expect the operating performance of companies with real estate assets in countries bordering Ukraine or Russia to weaken much more than their Western European peers. However CEE markets are more vulnerable to eroding investor sentiment and risk perception,' the report said.
