Does the rise in interest rates threaten Socimis? «The environment suggests being selective with real estate»
Are they threatened socimis with this scenario of rising interest rates? «The current environment of uncertainty regarding growth makes it advisable to be selective with real estate,» they say in Rent 4. They believe that, despite the operational improvement in an inflation environment, the ‘momentum’ is snatched by the rise in rates and the rebound in TIRes, preventing the market from recognizing the value of these companies.
«Together with a good macroeconomic tone until the first half of 2022, the operating results of the socimis will find this year a catalyst in the inflation environment, given the indexation of the contracts. In addition to operating profit, they offer an attractive return via dividends, making them a good alternative in this context. However, generalized falls in the sector are being recorded, which has caused a narrowing of the spread with the profitability of the assets,» the entity’s analysts explain.
By sectors, the Officesand given the existing correlation between the demand for office space and the GDP, as well as the creation of employment and the constitution of new companies, Renta 4 considers that the current environment of uncertainty in terms of economic growth in Spain and Europe makes it is advisable to be selective with real estate. «The quality of the assets and their location will be key factors in leading rental increases (or simply sustaining them) and maintaining occupancy levels, thus leaving valuations more protected,» he says.
As for the retail sector, the entity highlights that there is no doubt that electronic commerce will continue to grow in our country, especially if we take into account the growing user base. However, it points out that «not all the volume and transactions of electronic commerce affect or cannibalize the activity and sectors of physical stores in general and shopping centers in particular.»
«Despite the tone of recovery shown by inflows, the current context marked by strong inflation should have a impact on the evolution of private consumption in the short term (less purchasing power), thus implying some caution with respect to the sector». «Taking into account the threats that lurk in the short term on the fundamentals of retail, as well as the misgivings about the long-term evolution of physical retail given the rise of the electronic commerce, we consider that it has to be selective with strategy and asset positioningAnalysts point out.
Despite the current environment, and although retail investment activity in Spain was very low last year, «2022 is showing a clear recovery in investor interest.» And they give figures: until the first half of the year, the investment levels of 2021 in the retail sector have more than tripled. Shopping centers are leading investment in the sector, «reflecting an interest on the part of investors in assets with renewal potential and dynamization of the commercial mix».
Meanwhile, in the logistics sector, precisely this advance in electronic commerce has worked as a catalyst for these places, generating the need for new storage spaces and distribution points close to the final consumer. «The tailwinds of recent times have carried the logistics contracting at record levels at the end of 2021. Although the hiring levels until the first half of 2022 are below the figures reached in 2021, they still represent the highest hiring figures, with the exception of last year’s record».
The entity stresses that, «despite the moderation in private consumption that could be expected in the short termfrom the main real estate consultants point out that prime rents in logistics should continue to register slight increases in the future, taking into account the strength of demand and relatively limited availability».
In this context, and taking into account the threats of the macroeconomic environment that lie in wait for the progress of the economy and consumption, as well as the rate environment, Renta 4 believes that the logistics sector could you take a breather in the short term, with a moderation in investment levels and a slight rise in yields. Likewise, they believe that the sector has long-term catalysts in the hands of the growth of electronic commerce and the outsourcing of logistics solutions to specialized operators.
REITS LIST WITH MAXIMUM DISCOUNTS
Regarding the companies and their behavior, Renta 4 comments that the socimis are listed at maximum discounts, «well above their historical discounts and at levels similar to those of the moments of maximum uncertainty during the great confinement in 2020, thus turning their back on to the good results that are expected to reap throughout 2022«.
As the experts explain, the valuations of the assets of the companies analyzed have not stopped growing throughout the year, «thanks to an environment of inflation that has boosted gross rents and operating profit as a result of real estate rentals». Taking into account the expected economic slowdown, the market is already discounting that valuations should correct in the short term, without operating growth already compensating for the increase in discount rates, they say.
Another implication of the interest rate hikes and the rise in the Euribor is the rise in the cost of debt, especially relevant in the real estate sector, which has traditionally had a high level of financial leverage.
With all this, Renta 4 has lowered its recommendation from ‘overweight’ to ‘hold’ for Árima and Colonial, while reiterating ‘overweight’ for Lar España and Merlin Properties, «despite the fact that we believe that the current rate environment will generally weigh down the price of the sector in the short term«, he points out.
Specifically, about arima They believe that it offers an attractive long-term investment thesis in the property sector, but the current macro environment, together with its low liquidity, will weigh down its stock market performance in the short/medium term. For its part, Colonial It has a portfolio of assets «of unquestionable quality, more resilient to cycles (both operationally and in valuation), but with an underlying profitability that in the current rate environment we believe is assuming a movement of flows towards fixed income«. They anticipate that market sentiment will weigh down its stock market performance in the short term.
Despite the macro environment and sentiment around the sector, they say Spain offers the highest recurring dividend yield among the companies analyzed (close to 10% at current prices) and that the underlying return on its assets is more attractive in the current interest rate environment compared to that of other socimi. «Although retail may be particularly affected by an unfavorable macro situation that impacts private consumption, the dominance of the company’s assets gives it a competitive advantage and some protection against adverse cycles.»
MERLIN PROPERTIES, THE FAVORITE CHOICE
Lastly, they acknowledge that Merlin Properties continues to be his favorite choice (top pick) within the listed Spanish real estate sector: «We consider the management team has demonstrated a correct reading of the market and economic cycles, being capable of adapting its operating and investment strategy».
Renta 4 positively values leadership and portfolio diversification of Merlin, especially its exposure to the logistics segment, «offering an underlying gross return on the operating portfolio of approximately 4.5% (at market value), which implies at current prices a recurring dividend yield of more than 5%» .
In addition, they underline that the company will benefit in the short term from the inflation situation, «counting on clear catalysts in the medium and long term.»