Bounce in European property stocks: false start or turning point?

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It's hard to be bullish about real estate in an environment of sharply higher interest rates. Yet unloved property stocks in Europe staged a surprise rally this summer, suggesting contrarian investors are starting to look past the worst.

Two years of steep falls have made European property a short-seller favourite as sector valuations and investor positioning plunged to levels last seen during the 2008 global financial crisis.has halved in value to about $131 billion since 2021, but the mood shifted in July as earnings expectations improved.in July by as much as 10 percentage points before a volatile August, squeezing short sellers just as inflows into some sector-focused exchange traded funds picked up.

Refinitiv data shows earnings revisions turned positive in July after 15 months of downgrades. Profits are now seen rising 1.4% in 2024, versus previous expectations of a slight drop. "It is a scenario. But I don't know how likely it is... I think it's going to take longer and we may have another low before we have ups," he said.

Real estate in Europe is 30% cheaper than its 20-year average price-to-book valuation and displays a 49% discount to the market, its biggest in fifteen years, Refinitiv data shows. Banks are increasingly vigilant about a deterioration in the quality of their loans to real estate firms, with key ratios including loan-to-value under sustained pressure, raising the prospects of covenant breaches which could force borrowers to top up equity or even sell assets.

 

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