Stock markets continued their recovery last week. It feels like the pain trade is up. The economy remains solid, while investors who sold stocks during the sell-off earlier this month may now feel pressure to increase their holdings again.
Because I believe interest rates are going down, 30% of the portfolio is invested in European real estate: Gecina, Vonovia, UNITE, Land Securities and British Land. These companies are in the portfolio because their shares can be bought at a discount to the value of the properties they own.
Take $GFC.PA (Gecina), a French real estate company. The majority of its property portfolio consists of office buildings in Paris.
Offices have been affected by the trend towards working from home. This has led to reduced office utilisation, increasing vacancies, lower rent growth, and lower office building valuations. The value of Gecina’s properties (EPRA NTA) fell almost 20% in 2023.
So what is positive about the company and why is it in the portfolio? The first thing to note is that property values have stabilised. Over the last six months, values increased +0.2%.
Much of the fall in property values last year was driven by higher interest rates. If interest rates stabilise, we can expect that property values will stabilise, too.
The majority of Gecina’s properties are in Paris City. These are top quality properties with restricted supply, high occupancy rates and increasing rents. There is only limited exposure to La Defense, a business district in Paris that has been more affected by the work from home trend.
The company has a healthy balance sheet. Its LTV (loan-to-value) is only 35% and it has an A- credit rating.
Despite all this, the company’s shares trade at 96 euros, a level that was previously reached in 2011 and 2014. The company’s property portfolio is valued at 142 euros per share. Thus, we can buy Gecina’s properties at a 30% discount to their market value.
This would make sense if the value of Gecina’s properties was expected to decrease in the future. This would be likely if interest rates went up, if the economy of Paris went into recession, or if the work from home trend intensified.
Because I don’t regard any of these possibilities as very probable, I like Gecina shares. The shares have historically traded at a 15% discount to book value on average. This suggests 20% upside may be available.
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