19 November 2019 11:30

The real estate sector offers attractive valuations: IGD’s stock also recovers part of its undervaluation

In the latest trading sessions IGD’s stock returned to trading at around 6 euros. Notwithstanding the noticeable recovery posted compared to the year low, hit on 20 August, the price of IGD’s stock continues to trade at an ample discount against its NNNAV per share of 10.78, calculated based on the real estate valuations recorded at the end of June. The strong discount against the consensus price of the six analysts covering the stock is also still significant. IGD continues, therefore, to be undervalued with a significant gap to close.

IGD’s stock began to rebound significantly as of the second half of August: at the close on 4 November the price had risen 12.4% compared to the year low of €5.24 reached on 20 August 2019. The recovery was driven by a series of factors that also had an impact on the overall performance of the Italian stock market and the European real estate sector as shown in the chart below.


Source: Italian Stock Exchange and EPRA data compiled by IGD


Despite the persistant trade dispute between China and the United States, as well as the uncertainty about the outcome of Brexit, in the last few months the markets benefitted from the more accommodative stance of the the central banks. In Europe, in particular, in light of the weakening economies and, more specifically, the strong exporters like Germany that were impacted considerably by the current trade war, on 12 September the ECB announced a package of measures to ease monetary policy based on which the interest rate charged on bank deposits was cut by 10 basis points to -0.5% and a quantitative easing program (QE2) of €20 billion in bond purchases each month was restarted as of November 2019. To the extent that the impact of monetary policy can only be limited if the European governments fail to launch fiscal stimulus, the financial markets reacted positively to the ECB’s accommodative stance, as well as the the appointment on 17 September of Christine Lagarde as ECB president which was viewed as a guarantee that the position of her predecessor, Mario Draghi, would be maintained.

The real estate sector and, in particular, the retail segment stocks, were subject to pressures linked to a generalized rerating of stock multiples. The investors fear that it is improbable that the rents at shopping centers in Europe will grow in organic terms, also due to the pressures stemming from leases based on sales revenues, and that this fact will, sooner or later, result in lower asset valuations which could affect the asset disposals that some players planned on in order to make acquisitions without altering their LTV.

Nothwithstanding, in the last few weeks the real estate sector benefitted overall from the adjustments that many large institutional investors are making to their portfolios. A sector rotation that drove many to take profit on utilities, which were trading at very high levels, in order to look for value stocks. In this way, the real estate sector, which has very low multiples, represented an ideal value opportunity.