Real estate investors will need to place an even greater focus on the stability of their income streams as inflation and interest rates rise.
The team at MSCI Research analysed the constituent of the MSCI Pan-European Quarterly Property Fund Index, and found that three-quarters of remaining income was contracted to tenants in just three segments – consumer staples, consumer discretionary and industrials.
“Investors usually think of their exposures in terms of capital value, but exposure to property types and geographies can look different when measured instead by remaining income, or the total amount of contracted income outstanding on the lease up to the next break-clause date,” wrote MSCI Research’s Fritz Louw in a new paper.
Exposure to retail and industrial income was higher when measuring income than capital value – with residential and office dominant when breaking down capital value.
“Across countries such as the UK, Spain and Italy, we have seen consistently higher exposures to remaining income than capital value across all property types,” Louw said. “France and Germany, countries with high exposure in 2021 on both capital value and income bases, saw the opposite, with significantly less weight to income than capital value.”
MSCI added that identifying individual companies with “outsized exposure and risk” will be challenging.
“Often tenant companies have complex holding company structures that make tenant concentration risk difficult to estimate, especially for cross-border portfolios,” Louw said.
“It is especially relevant to track corporate structures if parent companies grant rental payment guarantees to the landlords of their child companies, since the default risk is likely to be lower.
“By looking at aggregated income of parent companies, in conjunction with the weighted average default-risk scores, it may be possible to spot specific tenants that contributed disproportionately to the risk of the overall portfolio.”
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