Chart of the Week
Falling interest rates since the end of October have boosted real estate stocks in recent weeks. The STOXX Europe 600 Real Estate index (SX86P) has rebounded 25% since 26 October, when it reached a low last seen in December 2011.
If long-term interest rates settle at lower levels, they will limit the expected drop in asset values. Although prices per square metre are currently falling across various property market segments and probably have further to go in 2024, any ECB rate cuts next year should prove positive for the sector. Interestingly, real estate has suffered more from the pace of interest rate rises than from the levels reached. The rate moves have been too fast for rents to keep up with the rising cost of debt and this has penalised real estate cash-flow projections.
Meanwhile, real estate fundamentals have improved slightly. The residential sector is posting very moderate vacancy rates and in the commercial sector, debates on flexible working are no longer centre stage. In retail property, lessors have the advantage of index-linked lease agreements.
While real estate remains exposed to weak eurozone growth and deteriorating business indicators, the sector will be one to watch in the months ahead. Its long-term upside potential remains high as it emerges from four challenging years of Covid-19 lockdowns followed by rising interest rates.
Written on December 8, 2023. This is not an investment advice. Opinions subject to change.
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