Pascale Nachtergaele, manager of the Nagelmackers European Real Estate Fund, finds real estate still interesting given the low interest rate environment. Her preference continues to be for logistics property, but she also sees potential in other segments.
European real estate did less well than global equities in 2021, but Nachtergaele said she believes there was a big discrepancy between the various real estate segments. “Storage and logistics did extremely well, as did healthcare real estate, while residential property performed negatively. And since interest rates were very volatile, the real estate sector also behaved volatile in 2021.”
However, she said she remains positive for European property next year. “It is still opportune to diversify part of the portfolio into real estate. After all, we do not expect a sharp rise in German prime interest rates, which are still negative. In addition, the dividend yield of 3.4% on average remains attractive. The large buffer between the average dividend and long-term interest rates will be supportive. And as far as economic growth is concerned, we are not assuming a weak scenario.” Finally, Nachtergaele pointed out that sustainability will become more important. “The demand for sustainable real estate will only increase. There are a lot of opportunities in this area.”
Did she not see any risks for the European property market? “Yes, the covid pandemic in Europe is not yet under control and could cause increased volatility in the coming months. The latter could also be pushed up if interest rates start to rise and the ECB has to tighten anyway. That is why it remains important to do some stock picking,” she concluded.
Positive about logistics and residential property
Nachtergaele said she remains optimistic about logistics real estate, despite the already strong performance in 2021.
“The demand for such property remains enormous. On the one hand, there is of course the continuing strong growth of e-commerce, but on the other there is also the growth of near term shoring, bringing production and stocks closer to home. Companies today prefer to see goods coming from Europe rather than Asia. So there is a greater need for stock and storage capacity because people no longer want problems with stock accumulation. Moreover, transport and labour costs have risen sharply in Asia. And that is not all. A shortage of land is starting to manifest itself, making it more difficult to build logistics real estate. We are seeing rents rise and that is good for the top line.”
Pascale Nachtergaele has a soft spot for Intervest Offices & Warehouses because the logistics arm is not valued enough by the market.
In addition, the manager of Nagelmackers has become more positive on residential property. “We mainly look at Germany because it is a very large market with many listed players. This stock market year was not good because there was a lot of uncertainty about the rent freeze in Berlin and the elections. However, with the new government taking office, the risks have been significantly reduced.”
“Moreover, the imbalance between supply and demand in large cities continues to provide support”. German residential player Vonovia is already one of her favourites for 2022. For healthcare real estate, she said she is slightly positive to neutral.
“The increasing ageing of the population continues to play into the hands of this segment, while a major consolidation is underway. Meanwhile, occupancy rates are starting to rise again but, as Covid has not yet fully disappeared, there remains a higher than average risk around this market segment.”
Rather negative around offices and retail
For offices and the retail segment, Pascale Nachtergaele said she is slightly negative to neutral. “We are less negative than last year because we think many shares have seen the bottom. Offices will not disappear, but everything will revolve around accessibility, sustainability and flexibility. It will be a matter of picking stocks of players who are betting on this and are in the process of asset rotation or selling old buildings and investing in new ones.”
Like offices, shops and shopping centres will not disappear either, according to the manager. “The so-called omni-channel model, or the combination of physical shops and e-commerce, will be particularly popular. We avoid players with too high a debt ratio, because they will be forced to sell real estate and it remains to be seen at what prices this will happen.”
Fund data
YTD 12.65%
3 years annualised 10.29%