All it took was for sovereign bond yields to recover +20 bp to dampen enthusiam in the European property sector during 2017. Alphavalue’s following table which shows the relative performance over a year suggests that this could be an entry point.
The market has been waiting for a long time in the hope that the ECB will withdraw its stimuli and a lot of people are talking about this. What is less clear is how steep the yield curve will be and how corporate bond differentials will vary. With the current level of European 10-year sovereign bonds, property firms can obtain all the financing they want.
Attractive financing opportunities is one thing. But what is more important is to see if rentals will probably increase faster than financing costs. This should be the case in prime European cities where there is an accelerated economic recovery. The exception, in terms of visibility, is London, where the pressure of Brexit is evident. What is clear for office property is less obvious for retail property.
But at least an uptick in consumer spending on the Old Continent buys time for investment in bricks and mortar of retail and in the management of commercial centres. Alphavalue’s analysts are partly convinced, looking at recent history, that commercial centres can be very useful as showrooms and leisure centres.
As a purely opportunistic play, the following table highlights those shares with greater growth potential. Even if we think it’s the eternal expensive bet, UNIBAIL (add, target price €243) now has a +19% potential after a decline of 5% in the last month. Amongst stocks which have fallen very suddenly, here are some buy ideas: VONOVIA (add, price target €44,4), DEUTSCHE WOHNEN (add, target price €41,2) and INTU (add, target price 264 p) (which will soon become HAMMERSON (add, price target 621 p) with even bigger growth potential).
The experts should bear in mind that the property sector is a suitable option for investors looking for dividend yield. The current sector yield is 4.4% (pretax). So the return after tax is, in general terms, in line with the average European yield of approximately 3.5%.
As with any dividend yield, what is important is the capacity for dividend growth. In this area, the sector has an excellent track record once the rough patches related to the exceptional dividends from Unibail (2010) and Mercialys (2012) are resolved.
Alphavalue shares their recommendations for the European property sector with you: