(News Bulletin 247) – In the wake of the tensions that have shaken all the banks on both sides of the Atlantic, European property companies have suffered on the stock market in recent weeks, due to fears about their refinancing. But opportunities can also emerge from this movement.

The shock wave caused by the crisis that has shaken European and American banks since the bankruptcy of the Silicon Valley Bank (SVB) has many ramifications.

An important collateral victim has emerged: listed real estate. For example, the action of the French property company Gecina fell below 90 euros at the end of March, then falling by 17% over one month. Unibail-Rodamco-Westfield lost more than 20% over the same period while Germany’s Vonovia lost more than 30%.

“Following the banking events triggered by the fall of SVB, the market began to look at the balance sheets of regional banks in the United States. Investors then realized that their loan portfolios were exposed up to 43% to the commercial real estate, compared to 13% for the loans of the major American banks and around 10% for those of the European banks. It is therefore an overexposure. On the strength of this observation, the market has begun to fear difficulties in the refinancing of real estate assets in the United States and estimated that these fears could spread to continental Europe”, explains Florent Laroche-Joubert, analyst at Oddo BHF.

“But two major differences must be underlined: firstly, the experts agree that European banks are regulated more rigorously than American regional banks. Secondly, the fundamentals of commercial real estate in Europe are very often better than what we can observe in the United States”, he nuances.

Asset value pressures

These banking tensions come at a time when real estate companies have already had to deal for several months with the rate increases caused by the monetary tightening of the major central banks, such as the European Central Bank, which weakens the value of their assets and therefore puts their valuation under pressure. .

The environment of rate increases “above all penalizes the market for investment in real estate assets. A real estate group that wants to finance part of the buyback of an asset by bank borrowing must now pay an interest rate stronger. To meet its profitability objective, it will therefore offer a lower price than previously”, recalls Florent Laroche-Joubert.

“As a result, this environment of rising rates is likely to exert downward pressure on the value of existing real estate assets, knowing that their value also depends on other parameters such as location, the scarcity effect and the quality of tenants. “, he continues.

“This context of rising rates was not favorable for listed property companies between mid-August and mid-October 2022, investors then worrying at that time about the collateral effects on the value of assets, in particular The banking turmoil of the past few weeks has brought a new layer of uncertainty in the first analysis because it can add additional complications to the ability of the various economic players to refinance themselves with banks”, develops the analyst from Oddo BHF.

Opportunities to distinguish

In a note published at the end of March, Bank of America launched a severe warning in this direction, the credit constituting according to it “the lung” of the real estate sector. “The recent banking crisis is increasing the pressure on homeowners to refinance this year, not only because of rising borrowing costs, but also because the availability of new debt from banks and credit is becoming rarer”, pointed out the American bank. According to the latter, European real estate groups face “a wall” of 70 billion euros of debt to be refinanced, in total, by 2026.

Still, the picture should not be excessively darkened. Royal Bank of Canada notes that, within its coverage, European property companies display on average a “loan to value” ratio (net financial debt compared to the value of assets), a key indicator of the level of indebtedness among property companies , by 37%, which remains relatively comfortable. It also considers that the risks of violation of “covenants” – debt commitments to creditors – appear “limited”. As a result “attractive opportunities” exist, she said.

An observation shared by Florent Laroche-Joubert. “Beyond a few groups really in difficulty, investment opportunities appear in view of the stock market discounts that exist in the sector”, he considers. “This context should lead to favor stocks that offer good visibility on the strength of their balance sheet and their growth prospects. On the contrary, companies that are more indebted may have to limit their investments and sell assets to get out of debt,” he said.

Among the French stocks, one name comes up insistently in the recommendations: Gecina. The company headed by Beñat Ortega is a favorite of Bank of America and Barclays. For the British bank, the company has solid fundamentals and is one of the few stocks in the sector to expect growth in its net recurring earnings per share this year.

“Gecina is the typical example of a property company that has good quality assets, a solid balance sheet and good visibility on its future growth”, also judges Florent Laroche-Joubert. “Icade, for its part, is being paid at a very high discount and thus constitutes an opportunity, since the announcement of the sale of its stake in Icade Santé. In shopping centres, Klépierre remains the major European benchmark player with a very good compromise between the quality of its assets and a solid balance sheet”, notes the analyst.

Concerns about Unibail and Covivio

“On the contrary, two major French real estate companies are currently seeking to reduce their debt, they are Unibail-Rodamco-Westfield and Covivio, which must both operate asset disposal programs. However, if they have quality assets and that we remain confident in their ability to achieve their objectives, the recent banking turbulence is more likely to see the execution of these disposals being delayed beyond the short term”, he explains. also.

Unibail-Rodamco-Westfield must still sell 800 million euros of assets in Europe this year, after having already achieved 3.2 billion euros in sales, and intends to reduce “radically” its exposure to the United States. Its chairman of the board, Jean-Marie Tritant, explained to AFP at the beginning of February that this reduction in the airfoil in the United States will take place in 2023 or 2024 “as soon as the markets improve[ront]”. Covivio, for its part, intends to sell a total of 1.3 billion euros in assets by the end of 2024.