MS | Bart Gysens (analyst) has this Thursday published a report reviewing his preferences within the European property market, positioning himself for a transition from an environment of rising rates to one of recession.
Leverage is still the determining factor which the team uses to see where the value is and is not. But as we enter 2023, where the macros see a potential recession, thus driving a greater importance of profits, Bart sees less potential for differentiation and rise in yields.
That said, he warns that although the valuation on properties in the UK will drop more quickly in the short term, the valuation of the continental market will fall to a greater extent. Whatsmore, he flags that in line with previous cycles, he does not expect companies to make capital hikes, but to cut dividends to zero at the beginning of the year.
So the UK is still his preferred region (6/10 OWs are in the UK). And although he has remained neutral on the German residential market throughout 2022, he has turned a little more positive, but selective, and has raised LEG to OW. In Logistics and Healthcare he remains constructive, but less so than before, and reiterates his UW in continental retail stocks like Unibail and Klepierre.
- Colonial, EW, from 7.5 euros/share to 6.2 euros/share. Ana Escalante highlights the relative solid performance in these last few years as the company has benefited from the localisation of assets and good execution in terms of acquisitions and developments. That said, the yield on its portfolios is low at a time when rates are high. And although being indexed can drive some income growth, Ana acknowledges that the current macro backdrop is not favourable for the property market. While this can be partially already in the price, she does not see any catalysts for a potential re-rating.
- Merlin Properties, OW, from 11 euros/share to 10 euros/share: Merlin has significantly cut its financial leverage, from 39% to 31% via the sale of offices, at the same time as rates have risen considerably. Therefore, the company is trying to improve the risk/return, given that after reducing the risk, it is now focused on improving the profile of its returns. From now on, attention is on the execution.
