The credit outlook for Europe’s real estate sector remains stable despite the fallout from the Covid-19 pandemic. Weak spots remain retail, the UK market, and second-tier sites. E-commerce and digitalisation drive demand for logistics, data-centre space.
Scope Ratings, a German-based rating agency, says that delays in Covid-19 vaccination programmes and further partial or full lockdowns are likely to delay a generalised recovery in Europe’s property market to next year.
“The worst of the market impact may be ahead of us, as government support schemes are gradually unwound which is when we get to see the full impact on the economy from the pandemic,” says Philipp Wass, an analyst at Scope.
“The risk of tenant defaults and/or reductions in tenants’ real-estate footprint are the Damocles sword hanging over the sector: real estate companies would face a larger-than-expected decline in cash flow, squeezed profit margins, a lower weighted average of unexpired lease terms and reduced like-for-like rental growth – to say nothing of higher leverage ratios,” says Wass
Large, diversified property companies and/or those with a focus on more resilient asset classes such as logistics and data centres will cope with the “new normal”, keeping business- and financial-risk profiles stable.
For now, reduced new building construction during the pandemic – which has helped offset the slump in demand in many subsectors – continued low-interest rates, and conservative financial policies are all the supporting the credit outlook.
“However, the composition of each company’s property portfolio remains a critical factor as we watch the highly uneven impact of the Covid-19 shock on different segments,” says Wass.
Wass sums up the outlook for the main property subsectors as follows:
Retail:
“We expect an accelerated transformation of the sector marked by widening yields, higher leverage, reduced development pipelines, and pressure to streamline portfolios with the accelerated shift to online shopping.”
LTVs peaked end-June 2020 on declining rents and widening yields, notably for UK-focused REITs such as intu Properties PLC – currently in administration – Hammerson PLC, Capital & Regional PLC. The REITs face shrinking headroom under debt covenants. Continental European REITS face similar pressure this year.
Office:
“Nominal rental growth is steady, but we see falling net rents after incentives and slow rather than drastic increases in vacancy rates as employers reassess working-space requirements as remote-working rises.”
Industrial:
“Rents are on the rise with stable occupancy, and further convergence in logistics versus shopping centre yields in addition to growth in demand for data centres.”
Residential:
“Stable rental growth is the norm, with steady occupancy rates and yields, ensuring leverage ratios hold steady. Prices will continue to rise, but asset managers remain under regulatory pressure– from rent control to meeting greenhouse-gas emissions targets – to diversify.”
For example Vonovia SE (rated A-/Stable) has pursued geographic expansion mainly in Austria and Sweden since 2018. Deutsche Wohnen AG has diversified by acquiring nursing-home operator Katharinenhof. Vertical integration is another strategy that European companies have followed, bringing property development in-house as Adler Group SA did in acquiring Consus Group.
