Looking for consistency in uncertain times

Key financial metrics demonstrate the resilience of the listed real estate sector, says EPRA’s Dr Dilek Pekdemir.

The European listed real estate sector is navigating substantial shifts driven by macroeconomic and geopolitical uncertainties. For investors, applying relevant benchmarks and performance metrics is crucial in evaluating their investments in this changing economic climate and shaping investment strategies.

The key performance metrics that matter

Investment approaches to listed real estate vary widely. Stable and predictable cashflows are seen as major investment driver by generalists. Specialists also highlight the intrinsic value of the underlying real estate assets. Since both groups share concerns with balance sheet/leverage issues, valuing listed real estate becomes more challenging during economic uncertainty.

The European Public Real Estate Association (EPRA) has highlighted key financial metrics demonstrating the sector’s resilience (as of H1 2024):

• Declining loan-to-value ratios – average LTV ratios have dropped to 38% since the Global Financial Crisis (GFC).
• High fixed-rate debt proportion – around 82.2% of total debt is at fixed rates, helping mitigate exposure to higher interest rates.
• Lower debt-to-equity ratios – while slightly higher at 0.98 than the 10 year average in the post-GFC period (0.95), it remains much lower than the GFC peak of 1.63.
• Extended debt maturities – around 56% of the debt issued by listed European real estate companies mature between 2025 and 2028, allowing companies time to adjust to new interest rate levels.

Challenges from shifting macroeconomics

The European listed real estate market has faced challenges, driven by rising inflation and interest rates. Central banks have shifted their monetary policies to tackle inflation: the ECB raised rates by 450 basis points (July 2022 to September 2023), far exceeding the 175bps rise during the GFC (2006-2008).

This monetary tightening led to sharp declines in the FTSE EPRA Nareit Developed Europe Index in 2022 (-36.5%), followed by a robust rebound in 2023 (+17.4%). Direct real estate also experienced declines during the same period – Green Street’s Commercial Property Price Index fell by 13% in 2022 and 10.9% in 2023.

This confirms the asynchronous, but correlated, nature of listed and direct real estate markets, with a time lag. A recent EPRA-commissioned paper by Oxford Economics emphasised that the two real estate investments exhibit a significant positive correlation, which strengthens notably when examining two-quarter lagged returns of listed real estate (Fig 1).

What’s next: easing interest rate cycles

The focus has now shifted to the pace of interest rate cuts. The ECB already lowered rates three times, starting in June (the main refinancing operations rate to 3.4% from 4.5%). The outcome of this monetary tightening strategy remains uncertain, but offers benefit to European listed real estate during this cycle.

The sector appears well positioned, supported a combination of low leverage, limited near-term debt maturities, and steep discounts to net asset value (NAV). Oxford Economics projects an 8.5% annual return for the FTSE EPRA Nareit Developed Europe Index in 2024, with an average return of 6.4% pa over the next five years, above the 3.8% average of the last five years.

Understanding performance metrics and market dynamics is crucial for comparing asset classes within multi-asset portfolios, particularly listed versus direct real estate. As the economic landscape evolves, European listed real estate could offer compelling opportunities for both specialist and generalist investors.

Dr Dilek Pekdemir is research manager at the European Public Real Estate Association