Fitch Ratings has changed its sector outlook for EMEA real estate from deteriorating to neutral, reflecting a “largely complete recalibration” of asset values to higher interest rates and improved access of sound property companies to bond markets.
The agency said it now believed that the worst of commercial property valuation declines had been booked and that market confidence had improved, with interest rates unlikely to increase further.
The change in perception is a notable shift since last year, which was accompanied by the sector facing unreceptive bond markets that were waiting for asset values to settle. From 2022 until the end of 2023, real estate companies predominantly used bank funding and disposals to meet their scheduled debt maturities, but, since December 2023, bond market access for stronger companies has improved significantly, which, in turn, improved their funding options.
Fitch added that its confidence had also come as most of its issuers had gradually chipped away at their refinancing wall in the past 12 months.
Canary Wharf, Sirius, Warehouses de Pauw, Wereldhave, Catena and SEGRO have issued equity, it said, while Klépierre, Vonovia and Unibail-Rodamco-Westfield had issued long-dated bonds, and Vonovia and SBB had received private equity financing, said Fitch.
It warned, however, that a number of companies still faced near-term refinancing risk, including Canary Wharf, Heimstaden Bostad, Peach Property and SBB.
Fitch managing director John Hatton said: “Fitch now sees a functional bond market in operation, with property value declines past the worst of the “Great Recalibration” process. This enables Fitch to change the EMEA real estate outlook to neutral, supported by on-going stable operational property indicators.”
Like others, Fitch noted strong tenant demand for offices in prime locations with flexible space and good ESG credentials and the associated rising office rents and falling vacancy rates, but warned of “some secondary offices” being at risk of becoming obsolete due to a combination of tenants requiring less space, remote working practices – particularly in long-commute locations – and “brown discounts” due to building upgrade costs to meet EPC standards.
In retail, its confidence to upgrade the real estate sector came from reports of increased rents, retailers using cost-effective physical stores to also fulfil online orders and successful brands expanding their store sizes. It added that UK shopping centre values and rents had stabilised, after declines in passing rent since 2018.
In logistics, the agency continues to see solid growth and a disciplined speculative build rate, while in the European build-to-rent sector, Fitch said supply remained tight and companies’ portfolios cannot churn vacated units quickly enough to attain rents closer to market levels. This means that potential rent increases remain locked-up as inherent value, said Fitch, while landlords’ costs and the cost of capital rise. Consequently, many residential-for-rent companies’ interest coverage ratios are tightening.
It added that market rents would have to reduce significantly to adversely affect regulated units’ rents, and that rents had already risen sharply in the unregulated UK market.
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