Research Briefing | Jun 23, 2023

Why eurozone REITs look better than the US and UK

We think that eurozone and US REIT prices will rise in H2 as inflation falls and interest rates peak. In particular, the eurozone looks to have the most favourable near-term potential for price growth despite underperforming over the year-to-date.

What you will learn:

  • Factors supporting our view include a wide yield spread and larger discounts-to-NAV, combined with inflation that’s expected to return to target quicker than other regions. This should allow interest rates to subside next year.
  • That said, a further leg downwards is likely in the near-term for the US and the UK due to inadequate yield spreads, credit tightening, and slowing economies. The impact will be uneven across individual REITs as higher rates hit operating expenses, particularly for those specialising in sectors with unfavourable structural headwinds and falling occupancy rates, and for those with short-term debt maturities and higher LTVs.
  • The picture is becoming increasingly differentiated by geography with the UK more exposed to a further correction than the US and eurozone. For the UK, expectations of higher-for-longer inflation and interest rates have reduced yield spreads, which means prices are weakening to capture the additional risk.
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