DNCA Invest Sustain Real Estate

"Higher for longer": Rising interest rates have been the defining theme of this economic start to the fall, as inflationary and fiscal concerns have fueled investor jitters. On the one hand, rising energy prices (oil up 35%–40% from July lows), combined with the resilience of economic activity—both in terms of growth and employment—led several major central banks to adopt a more restrictive monetary policy to contain this resurgence of inflation (the Fed, ECB, BoJ, and RBA all raised key interest rates by 25 basis points). On the other hand, political and fiscal risks have put additional pressure on government bonds, particularly in Europe and among countries with the most expensive public spending policies. As a result, long-term sovereign yields in several countries reached levels not seen in over fifteen years: the 10-year U.S. Treasury yield stood at 5.28% (+53 basis points over the month), the 10-year French OAT at 4.86% (+68 basis points), and the 10-year German Bund at 3.59% (+27 basis points).

The fundamentals of European listed real estate remain solid, but rising interest rates are once again bringing financing costs, balance sheet structures, and asset values to the forefront of concerns.

The securities in the portfolio that performed best this month are: Lamda Development (+0%), Shurgard (-2%), PSP Swiss Property (-2%), Welltower (-3%), and Swiss Prime Site (-3%). The worst performers were: VGP (-16%), Aroundtown (-14%), Altarea (-13%), TAG Immobilien (-13%), and Lumo (-12%).

The sector is trading at a 40% discount to its NAV, compared to a historical average discount of 20%.

M&A activity remains as intense as ever. Valuation discounts are reaching record levels and are sparking interest among investors who recognize the quality of certain undervalued assets. Following Prologis' acquisition of Segro and the merger of WDP and Argan, Irish Residential confirmed that it has received a takeover offer from Barings. The implied premium is around 30%, which is roughly in line with NAV. Barings has until November 9 to submit an offer.

The logistics company CTP held its Board of Directors meeting in September. A positive development was the message conveyed to the market regarding selective divestitures that could partially finance the expansion program. Rental demand is very strong, with a 46% year-over-year increase in signed leases, and 65% of new leases coming from expansions by existing clients. Management reiterated its target of more than €1 billion in annualized revenue by 2027. Long-term targets were also confirmed, namely rental revenue growth of more than 10%, recurring earnings growth of more than 15%, and EPS growth of more than 10%.

Merlin Properties has been negatively impacted by its exposure to data centers. A proposed Spanish decree would require new data centers to cover up to 80% of their hourly electricity consumption with renewable energy, which could significantly increase costs.

At the end of the month, WDP completed a €400 million capital increase to finance its current investments (Benelux, Romania, Italy, Germany) and future developments, as well as to prepare for the merger with Argan, while safeguarding its balance sheet.

This month, we added a new holding to our portfolio: Lamda Development. The Greek company owns shopping centers and manages high-end marinas. It is also involved in real estate development, notably through The Ellinikon, a project to convert the former Athens airport into a new neighborhood.

We favor companies with strong balance sheets, high cash generation, and positive operational momentum.

The subsector most overweight relative to the index is Logistics (CTP, Montea, WDP, Tritax BIG Box). In our view, it offers the best growth prospects. Stock selection is essential, and we prioritize the most attractive platforms. We also like certain Swiss real estate stocks (PSP Swiss Property and Swiss Prime Site) as well as certain retail names (notably Klepierre and Unibail). We remain underweight in German residential stocks, which we believe have the weakest balance sheets. Political pressure is mounting, and divestiture programs are becoming increasingly complicated amid rising interest rates. TAG and LEG Immobilien are favored in the portfolio over Vonovia, which has higher leverage and a more limited growth rate.

Our key active positions are: PSP Swiss Property (Offices), VGP (Logistics), Tritax Big Box (Logistics), Derwent (Offices), Welltower (Healthcare), and Aedifica (Healthcare).