EMEA Real Estate (REITs) Paving The Way For Renewed Growth - July 16, 2021 Franck Delage, Senior Director Nicole Reinhardt, Director - S&P Global
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EMEA Real Estate (REITs) Franck Delage, Senior Director
Nicole Reinhardt, Director
Paving The Way For Renewed Growth
July 16, 2021Key Takeaways
– The fallout from the COVID-19 pandemic has had a moderate rating impact so far, with six rating downgrades among the 61
real estate investment trusts (REITs) we rate.
– We expect an uneven recovery in the sector, taking longer in the retail and office segments than in residential and logistics.
– Although challenges remain for retail REITs, the reopening of shopping centers and the vaccination rollouts will aid the
recovery.
– We expect the flight to quality to continue in the office sector, with green and prime assets in central locations faring better.
– The residential market is likely to remain buoyant, despite rising capex.
– Demand for logistics space should continue to outpace supply and support solid rental growth.
– REITs’ bond issuance hit new record high in H1 2021, mostly to refinance debt at a lower cost and fund external growth.
– We expect REITs’ credit metrics mostly to recover by 2022, with the debt-to-debt plus equity ratio taking slightly longer.
2COVID-19 | Moderate Rating Impact On REITs So Far
Global Real Estate Ratings Versus Other Corporate Sectors Pandemic-Related Rating Actions On EMEA
Positive rating actions Negative rating actions % Negative (right scale)
REITs
150 100% – 12 ratings actions due to COVID-19 out of 61
rated REITs.
100 90%
– Six rating downgrades, Nine outlook
50 80% changes.
Number of issuers
0 70% – Most rating actions were on issuers in the
(50) 60%
retail segment.
– 50% of retail REITs were already on negative
(100) 50%
outlook before the pandemic.
(150) 40%
– Today, 25% outlooks and CreditWatches on
(200) 30% REITs remain negative (after a peak at 33%).
(250) 20%
Rating actions are tracked from Feb. 3, 2020, to April 23, 2021. Positive rating actions are upgrades, positive CreditWatch placements, and positive outlook revisions. Negative numbers signify negative rating actions. Negative
rating actions are downgrades, negative CreditWatch placements, and negative outlook revisions. Source: S&P Global Ratings.
3Our Assumptions For 2021-2022 | An Uneven Recovery
Property segment Key assumptions 2021-2022 (like-for-like) * Estimated time to return to 2019 level
Net rental income: 0% to 5% in 2021 / 5% to 0% in 2022
Retail
Asset revaluations: -5% in 2021 / 0% in 2022 2021 2022 Beyond
Net rental income: 0% to -5% in 2021 / 0 to -5% in 2022
Office
Asset revaluations: 0% to -5% in 2021 / 0 to -5% in 2022 2021 2022 Beyond
Net rental income: 0% to 3% 2021 / 0% to 3% in 2022
Residential
Asset revaluations: 0% to 3% in 2021 / 0% to 3% in 2022 2021 2022 Beyond
Net rental income: 2% to 5% 2021 / 2% to 5% in 2022
Logistics
Asset revaluations: 0% to 3% in 2021 / 0% to 3% in 2022 2021 2022 Beyond
*S&P Global Ratings base-case assumptions on rated real estate companies operating in Europe, on average, as of July 15, 2021.
4Retail | Reopening And Vaccination Will Drive The Recovery
Rental Uplifts Decreased But Remain Positive Despite Negative Retailers’ Sales
Key Takeaways Average 'reversion rate'/'leasing spread'/'MGR uplifts' reported by S&P-rated European retail REITs
versus tenants' sales like-for-like growth
– Rent recovery could be modest in 2021, constrained 10% Rental uplifts
by losses from deferred rents, increased vacancy
5%
and slow lifting of restrictions. Tenants' sales
0%
– Rent collection should recover more pronouncedly -5%
2017 2018 2019 2020 H1 2020
in Q3, after a relatively weak Q1 2021 despite
‘revenge’ shopping. -10%
-15%
– Rental uplifts are lower than pre-COVID but remain
-20%
positive in several European countries.
Sources: S&P Global Ratings, companies' reporting.
– U.K. issuers are facing more challenges than in
Rental Income And Asset Valuations Declined By 16% And 6% In 2020
continental Europe in rental income and valuation
Reported like-for-like growth (%)
growth, while the Nordics are outperforming.
10% 2018
– Lease terms remain largely fixed in Europe (>90% 2019
rental income). 0% H1 2020
2020
– Asset disposals are still subdued but close to, or -10%
slightly above, last appraisal values.
-20%
Net Rental Income Asset Revaluation
(S&P-rated peers) (S&P-rated peers)
Sources: S&P Global Ratings, companies' reporting.
5Office | Prime Assets In Central Locations Should Recover Faster
Key Takeaways Returns To Workplaces After First Lockdown Wave Were Uneven In Europe
Percentage of workers that have returned to the office
– Work from home will likely be adopted in hybrid 100% 88% July 2020
79% 82% 83%
75% 73% 76%
mode, but workplaces may require more 80% 70% October 2020
sqm/employee. Office space needs could be 10%-
60% 49%
15% lower. Returns to offices could be uneven.
40% 34%
– Rental income should remain mostly flat until 2022,
20%
pressured by potential vacancy on maturing leases
and softening market rents in most supplied areas. 0%
UK Germany Spain Italy France
– Flight to quality. Rising demand for service-oriented Sources: S&P Global Ratings, Morgan Stanley Research.
grade-A assets, with a higher proportion of
collaborative spaces and green credentials. 11% Of Leases Mature In 2021 In EMEA, But OnlyResidential | German Market Remains Buoyant Despite Rising Capex
Key Takeaways Greenhouse Gas Emissions From Buildings Are Set To Decrease
(mil. tons/year)
– The pandemic’s effects have left the German 250 100%
GHG
residential broadly unfazed in terms of rent 200 80% emissions
collection, payment defaults, occupancy rates. 150 60%
(left scale)
– Tenant demand should largely outpace rising 100 40% As % of 1990
development activity, owing to the structural 50 20%
levels (right
shortage of housing. scale)
0 0%
– Affordability issues may still lead to regulatory 1990 1995 2000 2005 2010 2015 2016 2017 2018 2019 2020 Target
changes and reputational risks, despite the recent 2030
cancelation of the rent cap (‘Mietendeckel’) law in Sources: BMU, DB Research, S&P Global Ratings.
Berlin.
– Growing environmental requirements imply rising Amount Invested In Construction Capex Is Increasing
capex for landlords. They nevertheless remain Construction capex (mil. €/year)
manageable for S&P-rated issuers. 600 2019a
– Low property yields could constrain direct 500 2020a
acquisitions and favor development as the growth 400
2021e
engine for REITs. 300
2022e
– More M&A remains likely, as share prices continue 200
to trade at or below NAV despite positive market 100
fundamentals. 0
Vonovia SE Deutsche Wohnen SE Adler Group S.A.
a--Actual. e--S&P Global Ratings' estimates. Sources: S&P Global Ratings, companies' reporting.
7Logistics | Demand Should Largely Outpace New Supply
Key Takeaways Ecommerce Should Continue Rising Significantly In The Next 4 Years
Retail ecommerce sales in Western Europe projections (bil. €, equivalent; share of total retail sale, %)
800 20%
– The pandemic has accelerated the growth of e- Retail
commerce. Higher corporate inventories boosted the ecommerce sales
600 (left scale)
need for logistics space.
% of total retail
– Rents should continue to expand, despite a 400 15%
sales (right scale)
significant rise in new supply across Europe. Net
absorption remains comfortably positive. 200
– Urban localization and “last mile delivery” type of 0 10%
assets should remain in high demand to address the 2019 2020 2021 2022 2023 2024 2025
need for faster deliveries. Projections by eMarketer as of May 2021, excludes travel and event tickets, bill pays, taxes or money transfers, food services and drinking
place sales, and gambling. Source: S&P Global Ratings.
– Vacancy should remain at historically low levels in
Europe, close to 4%. Tenant Demand Continues To Outpace Supply of New Logistics Assets in Europe
Completions, take-up, and vacancy (mil. metre sq; %)
– Asset valuations should stay positive this year,
30 10%
supported by record investments (H1 2021 was the Completions
highest Q1 ever), especially in Sweden and the UK. 25 8% (left scale)
20 Take-up
– Yields for prime logistics assets should continue to 6%
15 (left scale)
decrease, and catch-up with prime retail assets, 4%
10 Vacancy
which by contrast are rising. 2%
5 (right scale)
0 0%
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
Q1
Sources: S&P Global Ratings. CBRE EMEA Industrial & Logistics Leasing Market Snapshot Q1 2021.
8Debt Issuance In 2021 | Strong Liability Management
Back To Lower For Longer
Average maturity and coupon on new issuances by S&P-rated REITs in EMEA, excluding perpetuals
As of June 30, 2021
– Bond issuance by European REITs hit new 5.0% 10 Debt coupon
records in H1 2021( about €30 billion rated (left scale)
by S&P Global Ratings). 4.5% 9
Debt maturity
4.0% 8 (right scale)
– Market conditions in 2021 support strong
liability management efforts (longer 3.5% 7
maturities at lower coupons).
3.0% 6
Coupon rate
Years
– M&A is also boosting debt issuance. 2.5% 5
– Bond market remained accessible during 2.0% 4
most of the pandemic in all property
1.5% 3
segments
1.0% 2
– Issuers’ liquidity positions have improved.
The liquidity multiple for retail S&P-rated 0.5% 1
REITs was 2.7x as of Dec 31, 2020 (versus 0.0% 0
1.9x as of Dec. 31, 2019). 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
(ytd)
ytd—Year to date. Source: S&P Global Ratings.
9Credit Metrics | Most Will Recover By 2022
Debt-To-EBITDA Should Recover From Covid-19 In 2022
– Interest coverage did not deviate much and should remain S&P-adjusted debt-to-EBITDA ratio, average of S&P-rated REITs in EMEA (x)
strong thanks to low interest rates. EMEA REITs EMEA REITs (prepandemic)* 10-year historical average
16
– Debt to EBITDA should recover by 2022, owing to lower
investments and dividends. 14
12
– Debt-to-debt plus equity should plateau at the 10-year
average level, owing to asset devaluations 10
8
2007 2009 2011 2013 2015 2017 2019 2021f 2023f
Interest Coverage Will Remain Strong Debt-Debt+Equity: Back To The 10-Year Historical Average
S&P-adjusted EBITDA-to-interest ratio, average S&P-rated REITs in EMEA (x) S&P-adjusted debt-to-debt & equity ratio, average of S&P-rated REITs in EMEA
(%)
EMEA REITs EMEA REITs (prepandemic)* 10-year historical average EMEA REITs EMEA REITs (prepandemic)* 10-year historical average
5 60
4
50
3
2
40
1
0 30
2007 2009 2011 2013 2015 2017 2019 2021f 2023f 2007 2009 2011 2013 2015 2017 2019 2021f 2023f
f--S&P Global Ratings' forecast. EMEA REITs--average of S&P rated REITs in Europe excluding 3 outliers. *base case assumptions as of November 2019. Source: S&P Global Ratings.
10Looking Beyond | What Could Change Our Assumptions?
A significant virus resurgence in Europe and/or delay in normalization of the
health situation.
An unexpected hike in interest rates and/or more pronounced revaluation
decline.
Stronger inflation than expected.
Strongly positive rental uplifts on lease renewals.
11Real Estate | Our Latest Research
– Industry Top Trends Update: Real Estate (REITs) – Paving The Way For Renewed Growth, July 15, 2021
– Nordic Property Companies And Banks Can Cope With Mixed Market Conditions In 2021-2022, May 20, 2021
– Property In Transition: Zooming In On The Global Office Reboot, May 6, 2021
– European Office REITs Should Prove Resilient To A Gradual Decline In Tenant Demand, April 29, 2021
– Berlin's Rental Revenue Prospects Rise After Germany's Highest Court Overturns Rent Freeze, April 16, 2021
– Can European Retail Property Owners’ Belt-Tightening Save Ratings From COVID And E-Commerce Headwinds?, March 31, 2021
– Russia’s Housing Boom Isn’t Likely To Burst—Or Bust, March 19, 2021
– As European Hotels Grapple With Prolonged Restrictions Are Operators And Landlords Sharing The Pain?, Feb. 25, 2021
– Industry Top Trends 2021- Global REITs : Recovery In The REIT Sector Could Be Long And Uneven, Dec. 10, 2020
– Industry Top Trends 2021 – Global Homebuilders and Developers: Credit Quality Improvement Continues Into 2021, Dec. 10, 2020
– German Residential Real Estate Is Unfazed By COVID-19, Nov. 30, 2020
– COVID-19 Is Only Part Of The Threat Facing U.K. Real Estate Companies, Nov. 16, 2020
– Bearish Equity Market Sentiment Adds To European Real Estate Companies' Credit Risks, Oct. 9, 2020
– European Office Real Estate Companies: After A Resilient First Half Upcoming Lease Maturities Should Test The Market, Sept. 18, 2020
– European Retail Property Companies First Half Results Highlight Looming Risks, Sept. 3, 2020
– European Corporate Credit Mid-Year Outlook 2020: Real Estate (REITs), July 16, 2020
– European Corporate Credit Mid-Year Outlook 2020: Homebuilders and Developers, July 16, 2020
– COVID-19 Accelerates Structural Shifts In Global Office Real Estate And REITs, June 9, 2020
Available on www.capitaliq.com
12Analytical Contacts
Franck Delage Nicole Reinhardt
Senior Director & Sector Lead Director & Lead Analyst
+33-1-44-20-6778 +49-693-399-9303
franck.delage@spglobal.com nicole.reinhardt@spglobal.com
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