Equity income-beating yields at bargain prices
Investors looking for a stable earnings stream can find opportunities in the unfairly depressed valuations in the European property sector, according to SWIP’s Vicky Watson.
With all the furore that has surrounded the eurozone over the last couple of years, it is not really surprising that some investors have been avoiding Europe.
Traders have been on tenterhooks much of the time, waiting for the latest ECB report, or the results from Greek elections, or the latest round of political upheaval.
Caution has been one of the main drivers of investor activity, with many temporarily exiting the European listed property sector, for the perceived safety of bonds and cash.
But evidence would suggest they have been missing out. European property shares have been one of the best-performing areas of the market so far this year, not just when compared with Europe but also on a global scale.
The SWIP European Real Estate
fund has returned 14.8 per cent year-to-date against a benchmark return of 13.4 per cent. This is significantly better than the wider European equity market, which returned 6.4 per cent, and the 10.5 per cent return from global equities. Even UK Government bonds – the safe haven of choice for many – have actually returned just 3.8 per cent.
Real estate shares have seen a substantial re-rating since the start of the year as investors who are familiar with the benefits of this sector – higher dividends, increased flexibility and diversification – have been buying back in.
Income hunters are among the buyers. With interest rates at historic lows and markets still overreacting to each political development, investors are looking for pockets of the market that can provide good levels of steady income.
And with the European listed real estate sector currently yielding 5.1 per cent in the continent and 4.7 per cent in the UK, this is a good place to be.
The yield from listed property is much more secure and defensive than other shares. Income from the underlying property comes from rent, which is protected by a lease.
The legal nature of a lease means that tenants can’t just stop paying rent when times get tough. Leases are also indexed in Europe – each year rental incomes rise in line with inflation – which provides inflation-proof earnings.
Bad news, as we all know, makes for better headlines. We have all read stories of distressed property assets being sold off to anyone willing to take them on.
The kind of real estate companies we hold in our portfolio, though, have strong balance sheets. In some cases these stocks have actually been benefiting from this activity, with some able to pick up good-quality properties at bargain prices.
Likewise, in the occupier market, we are also seeing pockets of resilience – even in Europe.
The retail sector in particular has some well-managed companies that continue to thrive in difficult circumstances. Primark, for example, has an ambitious European expansion plan, despite the weak economic environment.
The discount-brand outlet recently announced its plans to open six or seven stores in France over the next two years. Apple, meanwhile, also continues to aggressively beef-up its presence in Europe, thanks to a seemingly insatiable demand for its products.
Occupiers want the best stores in the best locations, particularly in the prime, dominant shopping locations, which are owned by the listed players.
The German residential real estate market is also still expanding. Rental property uptake is rising in cities like Berlin and, with low rents in comparison to income, this trend should continue in the years to come.
GSW Immobilien and TAG Immobilien are two companies that we favour in this sector; both have seen a strong rebound – over 34 per cent and 26 per cent, respectively since the start of the year.
Despite the rebound, the sector is still trading at a 9 per cent discount to net asset value, so there is some potential for further re-rating.
Listed property has the advantage of offering a relatively secure income and the potential for capital growth – valuable attributes in a time of political and economic uncertainty.
We believe that listed property should form part of any property or high-dividend allocation.
Performance of fund vs sector over 1-yr
Source: FE Analytics
Vicky Watson is investment director of global equities at SWIP. According to FE Analytics, her
SWIP European Real Estate fund has returned 15.28 per cent over the past year, compared with 11.75 per cent from the IMA Property sector.