Real estate shares: Which real estate shares are now a clear buy

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by Klaus Schachinger, Euro on Sunday

Dhe hustle and bustle in Europe’s shopping malls is back. This is probably one of the reasons why the Swedish fashion group Hennes & Mauritz (H&M) will open a home concept shop in the Zuidpassage of Hoog Catharijne, the most visited shopping center in the Netherlands in Utrecht, this summer. Furnishing and lifestyle items such as mirrors, crockery, decorative cushions and small furniture are then offered there. The world’s only shopping center that can also be reached by boat has almost 30 million visitors a year when there are no restrictions. Hoog Catharijne from the portfolio of Europe’s largest operator of shopping centers Klépierre not only offers a large stage for H&M.

Reopening Winner

As in Utrecht, most European shopping arcades are coming back to life. The business of the shopping mall operators, who were badly hit by the pandemic, is recovering faster than expected. At the end of April, Klépierre presented strong figures for the first quarter. Net income from the same sales area increased by a good 88 percent compared to the previous year. In the expansion of the Gran Reno shopping center in Bologna, Italy, planned for June, 99 percent of the sales area has already been let.

Klépierre’s comeback is being celebrated on the stock exchanges, as are some of the big office landlords. Your business revitalizes the end of the home office requirement for companies. Since the beginning of the year, the shares of Klépierre and Spain’s office real estate manager Merlin Properties have increased in double digits – contrary to the trend in the European index Stoxx Europe 600 Real Estate, which lost almost a fifth. The papers of the French shopping center and office property owner Unibail-Rodamco-Westfield and the Swiss office property group Swiss Prime have also been positive since the beginning of the year. In Germany, Deutsche Euroshop’s major shareholder Alexander Otto from the mail-order company dynasty of the same name is using the revival of the shopping malls to significantly increase his stake in the country’s dominant provider. Together with the US financial investor Oaktree Capital, Otto is offering EUR 21.50 per share plus the dividend of EUR 1 per share for 2021.

The offer should be approved by the Bafin. From then on, the four-week acceptance period begins. The Otto family’s asset manager held around 20 percent of the group before the offer. The offer corresponds to a premium of 44 percent. The bidders have set an acceptance rate of 50 percent as the threshold for its validity.

A delisting of Deutsche Euroshop is not planned. The offer is based on the long-term value of the company, they say. With this perspective you can pay an attractive premium. The stock market has been punishing retailers for five years. There is no longer a distinction between strong and weak companies, says Oaktree Europe real estate investment boss Benjamin Bianchi. At the time of writing, the stock was trading at 22.14 euros and thus still below the bid with dividend.

The end of the comfortable times

While the operators of shopping centers breathe a sigh of relief, Germany’s listed landlords have lost favor with investors since the beginning of the year. The shares of Vonovia, Deutsche Wohnen, LEG Immobilien and TAG Immobilien have posted double-digit losses since the beginning of the year. For companies, the comfortable times with rapidly rising inflation and the turnaround in interest rates initiated in America and Great Britain are now obviously over.

Because key interest rates have been historically low for a long time, their rise makes the refinancing costs, which are important for performance in the real estate sector, more expensive than average in the medium term. The costs for development projects and new buildings have already risen significantly due to the higher prices for construction raw materials. In addition, banks are demanding more equity for project developments, reports Sven Carstensen, CEO of the real estate analysis company Bulwiengesa: “The market environment is forcing German commercial and residential construction into a kind of straitjacket. Material bottlenecks and extreme cost increases with increasing energy quality requirements are pressing,” says the industry insider

The costs for development projects are also increasing outside of Germany. The shares of Hamburg-based TAG Immobilien came under pressure due to the purchase of the largest Polish housing developer, Robyg. Its portfolio consists of 700 apartments and contractually secured projects to build 36,600 units. The deal also increases TAG’s debt. The ratio of liabilities (loans) to the value of the portfolio (value), loan to value (LTV), increased from 43.2 to 47.3 in the first quarter. This is now considered a risk.

Up until now, the six-monthly revaluations of the portfolios have regularly brought high book profits to apartment landlords. This allowed them to borrow money without increasing their leverage. However, only a small proportion of these funds were invested in the portfolio to increase its value. Rather, it was mainly used to finance share buybacks, dividends and takeovers. Now this abundantly bubbling source of book profits is threatening to dry up. The corporations limit themselves, probably soon also their generosity towards the shareholders.

Vonovia, with 550,000 apartments in Germany, is slowing down when it comes to new buildings and investments and is considering index rents, in which the basic rent is adjusted annually based on the consumer price index: “If inflation is permanently four percent, rents will have to increase accordingly every year in the future. Otherwise many landlords will get into serious difficulties. We can’t pretend that inflation will not affect rents,” says Vonovia boss Rolf Buch, triggering a storm of indignation among tenants’ associations and politicians.

INVESTOR INFO

European champions

Rising inflation and higher energy costs are likely to curb consumers’ desire to shop. Shopping center operator Klépierre is prepared. Debt is low (LTV: 38.3), the average interest burden is low, and no new buildings are built. With the sale of the Tree portfolio for almost two billion euros, the debt of the Spanish office landlord Merlin Properties has fallen from 39 to 31. Both stocks offer attractive dividend yields.

Oaktree is a successful real estate investor and sees a lot of potential with the major shareholder Otto, which can be realized with a successful offer. At EUR 39 per share, the net asset value, the value of the property minus liabilities, is well above the offer. Even at the current price level, it should be worthwhile for private investors to enter or expand positions.

Germany’s residential giants

The turnaround in the market should now be priced in by Germany’s largest listed landlords. The dividend yield is attractive. Deutsche Wohnen is examining the sale of its care properties. The segment is on the books at around 1.2 billion euros and should deliver high sales proceeds. There is no profit and loss transfer agreement with majority owner Vonovia. So the money stays in the till. The credit rating is excellent and the debt low.

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