Commercial property

Yesterday, the property segment slightly overreacted (-2/-3%) to broader stock market indices and amplifying their decline. This marks the second such signal in just a few weeks. The corporate bond market remains relatively quiet for the moment: two days ago, Klépierre placed €500m in 8-year bonds at a yield of 4.03%. This is equivalent to a credit spread of around 95bp, which remains relatively low. Klépierre retains its A- rating, the highest in the sector.

Yet we believe there are reasons to be cautious : BBB spreads started to edge up in the US. This is a key area to watch for the entire property segment, given that this spread has remained at very low levels in Europe for quite some time and refinancing activity in the sector is set to accelerate over the coming years. When added to base rates, this could accelerate pressure on FFO from 2027-28 onwards if the spread to Europe is confirmed.

From a tactical standpoint, it is likely best to remain cautious regarding the property sector and related areas (including residential development) in the weeks ahead—whether due to spreads or, more simply, benchmark rates (Sovereign, 10y/mid SWAP etc.).

Among the companies requiring the greatest caution - the most heavily indebted ones, or due to the timing and volume of refinancings - are:

1. Property companies, in descending order of vulnerability, key picks: i/ Colonial SFL (maturities) ii/ Unibail / URW (leverage +US exposure) iii/ Aroundtown (high leverage + maturities).

2. Residential Development : i/ strill fragile Nexity (France) ii/ Instone (Germany) to a much lesser extent

3. Safe harbor identified, but only in relative terms: i/ Klépierre (low debt) ii/ Deutsche Wohnen at a lesser extent. 

Keep in mind, however, that the real estate sector as a whole will be viewed as a proxy if credit spreads blow out. The entire German residential sector could still be broadly affected, then—most notably the most highly leveraged player, Vonovia, and to a lesser extent TAG and LEG.

4. Special situation : Given Prologis's 75%-stock offer for SEGRO, developments regarding the BBB rating in the US could impact SEGRO via the merger exchange ratio if Prologis's stock price is affected.

In terms of positioning and fundamental recommendations, we continue to favor defensive plays that offer predictable medium-term LFL growth and are best equipped to withstand this risk: specifically, remaining very negative on the office sector overall while maintaining a rather positive view on German residential real estate. Consequently, the latter is where one should primarily look for - forward - opportunities.

Expert Opinion:
We love the call. We would favor the Short Unibail which on top of the overall sector weakness is considered (potentially wrongly) as French and therefore could suffer more with rising concerns regarding financial stability.  The long leg of a pair trade is trickier. Vonovia could be a candidate (even though its endebtment is quite high). Segro under bid is also a potential candidate but a bit risky to our liking should deal fail. In all, We would stay away from the sector and especially from Unibail. 


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