Jefferies constructive on European real estate in 2024

Unibail-Rodamco-Westfield SE

11/01/2024 08:53

** Jefferies sticks to its constructive view on the European
real estate sector in 2024, though flags that the market might
be too optimistic about the timing of the first interest rate
cuts   
    ** "The real estate sector should benefit from first rate
cuts as a whole; however, if the market is too optimistic with
first cuts, the most leveraged companies should underperform the
overall index," - the analysts write in a note 
    ** They list Argan  AGX.N , Aroundtown  AT1.DE , Grand City
Properties  GYC.DE , LEG Immobilien  LEGn.DE , Colonial  COL.MC 
and Merlin Properties  MRL.MC  among highly indebted firms
facing the risk of a credit rating downgrade, adding that
Vonovia  VNAn.DE  and URW  URW.PA  are close to that as well 
    ** The relief from rate cuts could be short-lived, the
brokerage says, as "most companies have not yet felt the impact
of rising interests and the asset decline is most likely not
over, especially given the lagging stance of European experts"
    ** It expects asset valuation to fall by 7% on average in
2023, and by 3% in 2024 
    ** The office players will be in focus throughout the year,
it says, as they are facing stronger headwinds than other
sub-sectors due to the economic slowdown and the work-from-home
trend continuation  
    ** On the other hand, it adds that the retail real estate
units are well-positioned to benefit from sector re-rating as
its main KPIs are back to the pre-COVID levels, and retail sales
as well as vacancy rates have been broadly stable during a
recessionary environment   
    ** Jefferies cuts both Merlin and LEG Immobilien from "buy"
to "hold" citing lack of details on expansion financing for the
former and high debt levels for the latter
    ** It upgrades Mercialys  MERY.PA  to "buy" from "hold"
seeing better prospects for the underlying operations for the
group after the sale of Casino's French assets is completed  
    ** The brokerage is concerned about the German residential
landlords' business model given such high leverage ratios
despite one of the strongest supply and demand imbalances -
"German residential players are not out the woods yet," it says
    
    

 (Reporting by Andrey Sychev)
 ((andrey.sychev@thomsonreuters.com))