COMMENT UK listed real estate and its funding markets are on a firm footing despite challenging external conditions.
While no asset class is completely immune to issues like the invasion of Ukraine, inflation and rising interest rates, the listed sector is expected to remain resilient thanks to its strong fundamentals. This should provide assurances to investors as we depart from the low-rate status quo that has defined western economies for the past decade.
Since the economic crash of 2008, UK real estate has taken important steps that have made it more robust when facing economic headwinds. A huge part of this has been a reduction in the sector’s level of indebtedness, which will help it deal with future interest rate rises. The average loan-to-value for the UK listed real estate sector stood at 28% this summer, which is substantially lower than the 49% level recorded in 2007/08. Low(er) gearing ratios are becoming a central pillar to the sector’s future development and make it one of the most durable asset classes.
Furthermore, the vast majority of the sector’s outstanding debt is contracted at a fixed interest rate with maturities above five years. This means that most companies are not compelled to refinance in the near future, thereby sparing the sector vastly increased debt servicing costs in the short term.
Strength through diversity
Private markets are more susceptible to changeable conditions, as funding liquidity and quickly raising funds become more difficult. Liquidating an asset can, and often does, take upwards of 12 months, and we’re consequently seeing outflows being gated to prevent capital reserves dropping too low with the ensuing impact on debt servicing. It’s possible that this is being overestimated, however, with recent reports of significant outflows not appreciating the fact that fund terms mean that time restrictions are in place to guard against exactly this type of activity.
Of course, it could be argued that greater liquidity in the current market could come at the cost of heavy losses on investments given the direction of markets. However, the inherent strengths of real estate as a large group of assets mean that keeping capital in place is the better option, and the fall-back of selling to raise funds is always there. This is still true in the private markets, and the real estate sector needs to make sure it does a good job of communicating this during this challenging time.
In addition to rebuilding and strengthening their balance sheets, listed real estate companies have also expanded their investments into sectors that may not have been typical parts of their allocations in past years. This diversity provides them with exposure to a broader range of real estate sectors, which shields them in the event that one area is adversely affected.
For instance, some alternative assets – the value of which are far more dictated by demographic trends – will see less depreciation and may even grow in value. One example of this is the senior living sector, where ageing populations across Europe mean that demand for high-quality facilities is only going to increase – and therefore, so is the prospect of profitable investment.
Clearing clouds
It is unclear how long inflation and interest rates will continue to rise, though it is likely that we haven’t seen the end of the road yet.
That being said, the political will of central banks to keep raising base rates while European economies face downturns can only last so long.
However long it takes for conditions to stabilise, the listed sector and its prospects for funding remain strong. The message to investors is clear – by injecting capital into an asset class with low sensitivity to interest rate shifts and strong fundamentals in terms of returns and diversification, now is as good a time as any to prioritise listed real estate.
Dominique Moerenhout is chief executive of EPRA
