Photographer: Krisztian Bocsi/Bloomberg

Floor Caving In on Europe Real Estate Stocks Bashed by Rates

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European property stocks, already the worst performers this year, are flirting with a key technical level that, if breached, could signal more declines.

Battered by rising bond yields and Brexit uncertainty, the Stoxx 600 Real Estate Index has slumped to its lowest level since 2014 relative to its parent gauge. Now, it’s on the verge of falling below a technical threshold that has acted as a support since 2009, which would be a bearish signal.

Real estate shares have tumbled almost 13 percent since the U.K. voted to leave the European Union as concern about falling property prices hurt British companies, while bets for faster economic growth under Donald Trump spurred declines in the sector considered a bond proxy. U.K. firms make up roughly a fourth of the European sub-index, data compiled by Bloomberg show. 

“The real estate sector is strongly correlated to bond yields -- it will remain in a bearish trend as long as yields move higher,” Andrea Tueni, a Paris-based trader at Saxo Bank, said by phone. “The first few months of Trump’s presidency will be key for the direction of inflation expectations and yields, and so for real estate stocks.”

  • The 10-year German bund yield rose to as high as 0.4 percent Thursday, the highest in more than a month. Yields have climbed in recent months, following Trump’s U.S. presidential win and as central banks signal the era of “lower for longer” interest rates is coming to an end.
  • “The ingredients are in place for a toxic shock of falling rents and rising yields,” Jefferies analyst Michael Prew wrote in a note about U.K. real estate investment trusts, downgrading six firms, three of which are Stoxx 600 members.
  • The real estate index broke below its 50-day moving average on Thursday, a more short-term bearish signal. It has fallen 4 percent in 2017, versus a gain of 0.3 percent in the Stoxx 600.

  • Losses in shares including British Land Co. and Great Portland Estates Plc are dragging the FTSE 350 REITS Index lower this week. The gauge of U.K. shares on Thursday slumped the most since October, falling below its 50-day and 100-day moving averages.
  • The Stoxx 600 property gauge was little changed on Friday, poised for its first back-to-back weekly drop since November.
  • Analysts are forecasting earnings growth of just 3.5 percent for European real estate firms this year, compared with an increase of 13 percent in the Stoxx 600.
(Updates with Friday moves and real estate earnings forecast.)
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