(News Bulletin 247) – A recent study by Finexsi showed that at the end of 2023, the discount would remain around 40% for French real estate companies, more than their five-year average. But with the rate cuts, the situation could change.

Listed real estate groups have suffered in recent years on the stock market, weighed down by a series of external factors, such as the pandemic, then inflation and rising interest rates. These rate increases mechanically exert downward pressure on the value of existing real estate assets, as financing transactions becomes more expensive. To meet their internal profitability targets, real estate players are offering lower prices.

A listed real estate company like Gecina has seen its stock price drop by 30% over five years, since 2019, the period preceding the health crisis. For shopping center operator Unibail-Rodamco-Westfield, the drop was 42% over the same period.

But another thermometer than the fall in the stock market price is perhaps more relevant: the discount in NAV (revalued net assets). This discount reflects the gap between the NAV (more precisely the “EPRA NTA NAV” for real estate companies, which corresponds to the standards established by the European Real Estate Association) and the stock market value of the company.

A persistent discount

The ANR is a measure of the company’s equity by favoring a heritage, accounting approach. To simplify, this corresponds to the company’s net assets after revaluation of its real estate assets by real estate experts taking into account certain parameters (vacancy rate, rental market value, etc.).

Again, to simplify, this discount in ANR reflects in some way the difference between the accounting value of the company (excluding net debt) and its stock market value.

Historically, this discount has often been present even if, according to the Sfaf (French Society of Financial Analysts), “surcharges” have existed, that is to say that the stock market prices of real estate companies were higher than their NAV per share. This was the case in March 2015.

But generally there is a discount in NAV for real estate companies. This difference in value has several explanations. It may be due in particular to the delays linked to the sale of the real estate assets in question, to the vacancy rates of these assets, or to the prospects of the different real estate markets, lists the Finexsi firm. The Sfaf also mentions liquidity problems (i.e. to simplify the fact that there are not necessarily buyers to acquire a real estate asset in question). “More generally, the gap between the published NAVs and the market perception, as well as the volatility of the financial markets, are likely to have an impact on the levels of discounts observed”, explains Finexsi.

The firm published a study at the beginning of August examining the evolution of this NAV discount from December 2018 to December 2023. To do this, Finexsi took 10 large listed French real estate companies, namely Unibail-Rodamco-Westfield, Klépierre, Gecina, Icade, Mercialys, Covivio, Carmila, Altarea, Paref and Société Française Lyonnaise. The firm identified the discount at each publication of the NAV (every six months therefore, at the end of December and at the end of June). To measure this discount, Finexsi took the average of the closing prices of each group over the five sessions following the publication of their NAV. It then took an average on this sample of 10 shares per period.

Several phases can be observed (see the graph above). From December 2018 to December 2019, the discount is fairly stable and limited. From December 2019 to December 2020, the discount increases sharply due to the pandemic. With the health crisis and social distancing measures, the stock prices of real estate companies have, in fact, fallen more sharply than their NAV per share. Between June 2020 and June 2021, the discount is significantly reduced because stock prices are rising, supported by accommodative budgetary and monetary policies while the NAV per share is stabilizing. From June 2021 to June 2022, the discount increases again, because stock prices are plunging again, “in a context of inflation, geopolitical tensions and rising interest rates”, explains Finexsi.

Since then, this discount has changed little, Finexsi concludes in its analysis stopped at the end of December. At that date, the conclusion is that the discount of ANR, at 40% on average for the ten French real estate companies, was still higher than its five-year average (33%).

This discount has not necessarily been absorbed since the end of December 2023. To give an idea, compared to their NAV per share at the end of June published during the half-year results season, Gecina and Covidio had discounts of 38% and 40% respectively (based on the stock market price at the time of publication). For Unibail-Rodamco-Westfield, it exceeded 50%.

Towards a rebound in European real estate companies?

Given this still high discount, can central bank interest rate cuts reinvigorate the stock market sector (and thus reduce the discount)? Let us recall that the European Central Bank made its first cut last June. The American Federal Reserve is preparing to do so this September, with its chairman Jerome Powell having clearly telegraphed this in Jackson Hole.

In a note written in July, Laurent Saint Aubin, director of equity management at Sofidy, wrote that the “conditions for a strong rebound in real estate companies appear to be met”. The specialist cited in particular “the accentuation of the prospect of reductions in key rates” by central banks.

“This perspective should encourage a drop in short-term rates and lead to the start of an arbitrage of investments that use them (money market funds, dated funds, structured products with guaranteed capital, etc.) towards longer-term products, a movement from which listed real estate companies could benefit given an average gross dividend yield in the euro zone of 5.8%,” he said.

The manager also considered that the decline in asset values ​​was nearing its end. He also cited “weak” positive signals that should result in a stock market revaluation. Among these signals, the specialist listed real estate transactions that were not the work of sellers in difficulty. Or sales at valuation levels close to the NAV, such as the sale of a residential portfolio in Leipzig, Germany by TAG Immobilien. Or financing operations by market players that went very well.

UBS seems to be making the same observation. In a note published on Tuesday, the Swiss bank considers that if bond yields remain at their current level, and if the Fed begins to cut its rates, listed European real estate companies “could enter a recovery phase”. A 25 basis point (0.25 percentage point) interest rate cut in long-term rates compared to the period of publication of the half-year results could increase the value of their asset portfolios by 5%, it estimates.