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Midsummer update 2008
The first half of 2008 has been volatile for REITs. In this note, we review the
past six months and update our sector stance and stock recommendations. In
addition, we publish a separate focus report on Belgian REITs in which we
initiate coverage on four additional Belgian small cap REITs. Most importantly,
given the uncertainty about the market direction, we stress the importance of
relative calls. However, based on our economic scenario of a European
slowdown rather than recession, we believe that the recent strong fall in share
prices is not justified in all cases.
Dominant themes for the second half of 2008
In essence, the outlook is a macro-economic call, as various economic views
will exist. We base our sector outlook on our economists’ scenario of a
European slowdown rather than a recession. Turning to real estate markets, the
dominant themes for the second half have not changed materially from the first,
in our view. As a result, we stick to our Safety-over-Risk theme, as we believe
that portfolio with safer profiles can better pass on inflation. Like in the first
half, we expect volatility to remain at increased levels. Most importantly, we
expect differences in relative valuations to affect share price performance.
Relative plays and market direction
Although we see good value at current share price levels based on our positive
economic scenario, we feel that the added value of this sector report lies in the
relative comparisons of the stocks in our universe. We prefer VastNed Retail to
VastNed O/I, as the market is now pricing in similar risk perception (implied
CoE of 11.75%), which given the higher quality of the retail portfolio, is not
justified. Our second relative trade is Wereldhave over NSI, as NSI trades at
40bp implied yield expansion, which is some 170bp less than Wereldhave.
Individual stocks
We upgrade ECP to Buy as we believe the stock to be oversold given the
quality of its cash flows. Its current share price implies 95bp yield expansion and
17% portfolio write-down, which seems overdone. In addition, we upgrade
Befimmo to Buy following its recent sell-off, as with 65% of its portfolio longterm
let to the government it should be in an excellent position to benefit from
higher indexations. We downgrade NSI to Reduce as it is currently the most
expensive stock within our universe, which seems unjustified given the quality
of its portfolio and growth outlook. In general, we maintain our retail stocks on
Buy but keep for now a more cautious stance to the riskier offices REITs.
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