European REITs' Performance Surpasses that of US Counterparts

According to the FTSE EPRA/Nareit index European REITs returned 7.89% in the first half of this year, while American REITs returned 0.76% during the same period...

European real estate investment trusts (REITs) are no longer trailing their US counterparts as they did last year. A sustained period of recovery, which has seen core assets across Europe regain much of the value lost during the crisis, now sees European REITs performing far better than those from across the pond according to some measures. The recovery is expected to continue and to strengthen in the coming months.

There are "signs of things picking up in Europe on a fundamental level," said John Lutzius, a managing director in London with Green Street Advisors. He said that he is expecting a continued improvement in both rents and vacancy rates.

According to the FTSE EPRA/Nareit index European REITs returned 7.89% in the first half of this year, while American REITs returned 0.76% during the same period.

The performance was diluted by increased share issuances at the bottom of the market by UK and US REITs, which reduced the value of existing shares.

"If you issue dilutive stocks, even when underlying real estate prices recover, share prices won't recover because of the dilution," said Mr. Lutzius.

This led to a weaker performance in UK REITs, which was made up for by a strong performance by REITs in continental Europe, which had raised equity to a lesser degree because of strong performances in markets like Germany, France and the Nordic countries.

Looking at the FTSE EPRA/Nareit index we see that European REITs have regained almost half the value they held before the crisis. The index shows that the office sector was the best performing in Europe in the first half of the year, while industrial real estate (including warehouse and port spaces) performed the worst.

Investors are now hopeful that demand will remain strong and that the performance will continue to improve among European REITs in the second half of the year. Analysts and investors are particularly hopeful of a strong performance in Paris' office sector.

"Paris has a relatively low vacancy rate, at about 7%, and if there was a net absorption in the market, there could be a nice rent pop," says Mr. Lutzius.

According to Jones Lang La Salle there was 3.7 million square meters of empty office space in Paris in the first quarter, rents were holding firm at 750 Euros per square meter and investment was up 47% compared to Q1 2010 with 1.32 billion Euros invested.

London brings the opposite reaction; fears over the amount of speculative office space about to come online. Eyes await second quarter results for the city, which will bring details of exactly how much office space preleasing REITs are managing.

 

- Wednesday 27 July 2011

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