This week we received the Q2 valuations of the properties in our portfolio confirming our view that capital values have stabilized. With rental growth continuing unabated, we believe the stage is set to see some interesting total returns during the second half of the year and into 2025.

Public Real Estate Markets

The FTSE EPRA NAREIT Global REIT Index has delivered a negative return this year. After rallying strongly in the last quarter of 2023, REITs have fluctuated during the first half of this year, dipping in the middle of April but then recovering most of the losses by the end of June.

We expect that investors will progressively increase their exposure to the listed Real Estate sector to take advantage of decreasing interest rates.

According to Bloomberg Intelligence (BI), REITs operating in most property sectors are poised to grow net operating income in their portfolios, although growth rates may slow down. On average, tenant demand for assets is solid, with the exception of offices, and occupancy rates are elevated.

Debt costs for REITs are elevated, increasing interest expense and making refinancing more difficult. The Market is punishing REITs with LTVs above 30% by pushing share prices at a deep discount to NAV, on the expectation that dividends will eventually need to be cut as cheap loans are refinanced.

Nevertheless, we have seen some interesting buying opportunities during the first half, as in the case of Tritax EuroBox which has rallied 42% from the lows touched this year, with the last leg of the upside swing caused by news that Brookfield is considering making an all cash offer for the company.

Looking forward to the second half of the year, we expect that investors will increase their allocation to REITs in the expectation that lower interest rates will benefit the sector. According to BI, Real Estate transaction markets could loosen by 2025 if interest rates fall, setting REITs’ up for potential growth via acquisitions. Strong balance sheets should facilitate investments if capital markets and the transaction market are accommodative.

For more information, watch this webinar from the REIT Index providers:

Private Markets 

According to Green Street Advisors, US property pricing bottomed late last year and it’s been on the rise since then. There are a few property types where pricing is lower, but for everything else, pricing is flat or higher since the end of last year. The Green Street Commercial Property Price Index® increased 0.7% in June. Apartment prices increased 5%; pricing of other property types was unchanged

Always according to Green Street Advisors, the situation in Europe is similar, with property values having found their bottom this year. Indeed, we have also started seeing some improvement in our property portfolio, with most valuations flat relative to Q1 and some actually showing a small improvement.

As we can see comparing the shape of the US and European Green Street CPPI indexes, European property values have corrected much more during this cycle.

In our opinion this is partly due to the different valuation approaches. Whilst in the USA valuations are typically calculated using Discounted Cash Flows methodologies, in Europe the prevailing approach is Direct Income Capitalization based on market comparables.

As a result, we believe that European markets are currently a better place to deploy capital, since valuations are more reflective of the higher interest rate environment and the possibility to agree a deal with sellers greater.

For more information, watch the Green Street mid-year outlook webinar:

Recapitalization of the Long Income Fund

We recently announced our intention to recapitalize our Long Income Fund. Launched in 2018, the Fund has delivered steady distributions to its current investors who have now reached the end of their investment term.

The recapitalization will enable the Fund to provide liquidity to the existing investors and will enable incoming investors to acquire a diversified direct investment portfolio at an attractive valuation. As part of the recapitalization, we also intend to reduce the leverage attached to direct investments to a more sustainable level and exit all indirect investments in third party Funds.

For more information, please see the presentation on our dedicated Real Estate website:

Ruggiero Lomonaco
Head of Real Estate Funds

Contact our team

For more information or to speak with our Investor Relations Team at +9714 363 5600 or +9714 424 2700

Prices and Dividends – May 2024