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TEXT-S&P on credit quality in Europe's real estate sector
November 12, 2012 / 4:35 PM / in 5 years

TEXT-S&P on credit quality in Europe's real estate sector

Nov 12 - While the creditworthiness of rated European real estate companies
should remain stable for the remainder of this year and into 2013, like-for-like
rental growth opportunities are weak and depend on contractual rent indexation,
says a report published by Standard & Poor's Ratings Services titled "European
Real Estate Is Still On A Firm Footing, Despite The Weakening Outlook For
Letting Activity In 2013." Furthermore, over-renting could become a bigger issue
than in the past if 
contractual indexation pushes rents well ahead of market dynamics.

"Credit quality among our rated portfolio of real estate companies should 
remain stable into 2013," said Standard & Poor's credit analyst Anna Overton. 
"This is mainly because our base-case operating scenarios balance weak rental 
growth and over-renting with firms' well-diversified, high quality portfolios. 
Importantly, our rated universe of real estate companies has little or no 
exposure to the weaker performing economies of southern Europe."

Funding conditions remained positive for publicly listed real estate 
corporates in the second and third quarters of 2012, with 'BBB' category 
pricing within our expectations and comparable with other industry sectors. 
Investor sentiment toward the sector has visibly improved in the past 12 
months, and a number of companies have benefited from tapping less traditional 
funding sources such as loans from non-banking institutions and a wider range 
of privately-held debt instruments.

In the retail property segment, investors and tenants remain very selective, 
focusing mostly on prime assets and locations and disregarding other options. 
Demand from international retailers, who can typically cope with high rents in 
a recession, focuses on well-located modern shopping centers and prime 
high-street retail space. With the industry expecting a relatively low supply 
of new space in Western Europe over the next two years, we believe rental 
levels are unlikely to decline sharply next year, especially in the prime 
quality shopping malls that have been taking retail footfall away from 
secondary locations.

Other findings of the report are that:
     -- Corporate consolidation and rationalization are slowing the take-up of 
new office space in the region. This, coupled with speculative development 
being largely on hold in many cities, has led to a steady deterioration in the 
quality of vacant property, thereby favoring the larger established real 
estate companies. Prime office rents are unchanged in most cities, with modest 
increases in Germany and the Nordic countries.
     -- High-specification logistics assets look set to continue to perform 
well over the short to medium term, in our view. Although rents are down about 
1% year-on-year overall, prime rents have increased in core logistics markets 
such as the U.K., Germany, and Belgium. That said, tenants are adopting a more 
cautious approach in light of the current economic climate, preferring 
short-term leases over longer contract terms at new premises.
     -- Mortgage accessibility continues to constrain residential property 
markets in the U.K. and France, while mortgage credit expansion is boosting 
residential housing sales in Russia.

The report is available to subscribers of RatingsDirect on the Global Credit 
Portal at  If you are not a RatingsDirect 
subscriber, you may purchase a copy of the report by calling (1) 212-438-7280 
or sending an e-mail to Ratings 
information can also be found on Standard & Poor's public Web site by using 
the Ratings search box located in the left column at

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