Real Estate: REITs, best option among traded companies; Merlin Properties main recommendation

Housing markett

Bankinter | At this point of the cycle is it more attractive to invert in real estate through traded companies than real estate assets. The principle reasons are described below.

Greater returns: they are trading with significant discounts on the valuation of the assets, even if this is relatively frequent above all in the deceleration phase of the economy.

Greater liquidity: one of the main problems of real estate assets is their lack of liquidity, which is clearly in favour of traded real estate companies (except the alternative stockmarket).

Lower transactional costs.

Less risk: The larger the portfolio of assets, the greater the diversification and the less the risk. The REITs are the best options among listed companies as: (i) at least 80% of their portfolio are rented assets with a medium/low risk profile; (ii) they allow benefits from fiscal advantages (0% corporation and capital gains tax); and (iii) they are obliged to distribute at 80% of profits through divdends.

Our main recommendation in Spain is Merlin Properties. It has a well-diversified and balanced portfolio of assets for obtaining attractive returns (4.4% per dividend in 2019), with a moderate risk profile. Colonial is the company with lowest risk profile, with attractive returns compared to the 10 year Spanish bond, although trading in line with the valuation of its assets in June 2019. Lar España has a higher risk profile than those above, from focusing on commercial centres in Spain, although we consider it a valid option for investors with a more aggressive risk profile, given that: (i) its strategy is showing itself more defensive faced by the increase in e-commerce; (ii) it already discounts possible falls in the valuation of its assets (37% discount on NAV); (iii) it offers returns per dividend of 7.3% in 2019 which we consider sustainable until at least 2021; and (iv) we do not rule it out being the object of a corporate operation with a sufficiently attractive premium.

We recommend avoiding the real estate promotor sector (Aedas Homes. Metrovacesa and Neinor Homes), give that they present risks additional to those of the Spanish residential market, like (i) uncertainty over complying with their business objectives (results); (ii) sharp increases in the costs of construction; (iii) higher land prices; (iv) downward pressure on margins; and (v) shareholder structure, with majority positions still by their promotors (70% of Metrovacesa is in the hands of the banks and 52% of Aedas homes is in the hands of Castlelake). Our favourite in this environment is Aedas Homes, which is trading in line with its book value, equivalent to the acquisition price for its land portfolio at the lower part of the cycle (between 2014 and 2016).

In Europe, the real estate sector is heavily biased towards commercial centres (Unibail-Rodamco-Westfield, Klepierre and Intu), and the rental residential, over which much uncertainty hangs because of the rent freeze in Berlin, which could be extended to other cities in Germany. The US is the real estate market with the best outlook (except commercial centres), because of economic growth and expectations of further interest rate cuts, which could mean an increase in asset valuations.

To secure exposure in these geographical regions, we recommend two investment funds, both included in our Top Funds Selection, one global (Henderson Global Property Equity A2) and one focused on the US (Morgan Stanley US Property-A).