Investec Property Fund (IPF) says faster-than-expected interest rate increases will have a detrimental effect on its second-half performance.
Rising interest rates drive up the cost of servicing debt, while real estate investors also have to take into account the rising cost of refinancing debt that has matured.
The European Central Bank (ECB) has increased interest rates by 200 basis points (bps) this year. Last month, the Bank hiked rates by 75 bps — a third major increase in a row. It expects to raise rates further to ensure the return of inflation to its 2% medium-term target.
The Bank said at its past meeting that inflation would stay above the target for an extended period. Eurozone inflation reached 9.9% in September.
“The rising interest rate environment, both in SA but specifically in Europe, is expected to impact earnings in the second half,” said CEO Andrew Wooler.
However, Wooler said there are opportunities to take advantage of the dislocation in pricing through the hands-on management of the team as they seek to unlock further value within the portfolio.
“Returns remain attractive but debt markets are volatile creating uncertainty on long-term valuations in the logistics sector,” said Wooler.
IPF is a real estate investment trust (Reit) that owns a diversified portfolio of direct and indirect assets in SA and Europe valued at R22.5bn.
In Europe, it owns logistic assets in major locations in Germany, France, the Netherlands and Belgium. Its SA portfolio, comprising industrial, retail and office properties, is valued at R14.6bn, with 48% of the fund’s balance sheet in foreign investments in the form of a 65% interest in a pan-European logistics portfolio (PEL).
According to the Savills Autumn 2022 European Real Estate Logistics Census, 50% of research respondents say business conditions are more difficult than six months ago.
This reflects higher energy costs, rising inflation, higher cost of debt, difficulties in finding labour and labour costs, and the ongoing pressure on supply chains, according to Savills.
For the six months to end-September, the PEL portfolio of 48 properties valued at €1.2bn recorded 2.7% growth in base net operating income due to positive rental reversions and strong leasing activity.
Strong occupier demand and limited stock saw vacancies reduce from 2.3% in March to 1.2% with 6.7% average positive reversion on renewals and new leases.
Wooler said there is potential for further value unlock of about 63,100m2 of gross lettable area (GLA) to be developed at a cost of €49m. Rising debt costs and cost inflation has resulted in development costs increasing.
He said due to increasing demand for additional space they are reassessing the development of three plots of land in France and Poland.
The Savills research shows that despite uncertain capital market conditions, there is investor interest in the European logistics sector with many looking to continue to deploy capital to new logistics investments. Logistics and warehousing facilities remain the preferred investment asset classes with structural supply and demand imbalance favouring rental growth.
“With solid portfolio fundamentals comprising quality assets and strong tenant covenants, the business is well positioned to absorb potential future effects of inflation and cost pressures on the occupier base,” said Wooler.
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