European REITs have offered investors a rollercoaster ride over the past five years. While some sectors have soared, others have stumbled. Understanding these trends and the potential impact of rising interest rates is crucial for navigating the European REIT landscape.
Winners and Losers: A Tale of Two Markets
The top performers have been companies aligned with strong, long-term trends. Cellnex Telecom, a wireless tower powerhouse, saw its stock surge over 50% thanks to Europe’s ever-expanding mobile network. Residential giants like Vonovia and office leader Aroundtown also delivered impressive returns, exceeding 20% for shareholders.
However, the pandemic and shift to remote work took a toll on certain sectors. Unibail-Rodamco-Westfield, a major shopping mall owner, witnessed a staggering 60% drop in share prices. Retail and some office REITs faced similar struggles.
Industrial Reigns Supreme: The E-commerce Boom
The undisputed champions of the past five years have been industrial/logistics and self-storage REITs. Companies like SEGRO and Shurgard, capitalizing on the e-commerce boom, delivered impressive annualized returns exceeding 15%. The ever-growing demand for warehouse and distribution space fueled by online shopping has been a major driver for this sector.
The Interest Rate Tightrope Walk: Navigating Headwinds
Looking ahead, the outlook for European REITs remains positive. Demographics and economic trends continue to favor the asset class. However, rising interest rates and high inflation pose near-term challenges.
Lower Rates, Higher Returns (Maybe): A Balancing Act
A decline in interest rates could be a boon for European REITs. Historically, rising rates often coincide with strong economic growth, potentially benefiting the sector. Conversely, lower rates would decrease financing costs for REITs but could also lead to “yield compression,” where share prices stagnate despite rising dividends.
Double-Digit Returns? A Conditional Forecast
Some forecasts predict double-digit annual returns for European REITs from 2025 onwards if interest rates fall and rental growth resumes. Additionally, a decrease in interest rates coupled with declining inflation could potentially push the total return outlook for European real estate to 7.4% per year over the next three years.
In conclusion, European REITs offer promising opportunities, but navigating the current economic climate requires a nuanced approach. By understanding past performance, the impact of interest rates, and focusing on well-positioned companies, investors can position themselves to capture the potential rewards of the European REIT market.
