French real estate stocks offer haven in glum market

Despite months of outperforming slumping stocks in other sectors, analysts say French real estate shares still provide a brick-solid safe haven in a market gripped by gloom. Seasonal effects and the broad downturn in stock markets have slightly dented a two-year bullish run in the sector since the end of May.

But healthy fundamentals, good visibility and attractive returns on investment have turned stocks like Klepierre, a leading group specialised in the rental and leasing of offices and commercial property, into relatively safe bets for distraught investors.

'Many real estate companies offer very good visibility up until 2004/05, which is an undeniable plus in current market conditions,' said a property analyst based in London. Shares in Klepierre have gained six percent since the start of 2002 -- not a stellar performance under normal market conditions but solid as a rock in the current environment. Peer Simco has risen 6.5 percent, sharply outperforming the French CAC-40 and FTSE Eurotop 300 indices, both down over 30 percent. The European real estate index (EPRA) gained about 11 percent in the first half of the year, bucking all other sector indices.

And analysts say factors like tumbling equities markets and low interest rates create a virtuous circle by encouraging investment in the real estate sector and enhancing the attractiveness of its listed companies. 'This is a sector where cash flow visibility remains far better than in many other markets by the very nature of its business, since leases protect property firms from an economic downturn for two or three years,' said Societe Generale analyst David de Coussergues.

While British giants like Canary Wharf, Hammerson and British Land have been hit since the summer by doubts about the strength of demand for offices in EuropeÂ's leading financial centre, analysts remain very upbeat on stocks like Klepierre and French peer Unibail. The French companies offer greater exposure to commercial properties, deemed less directly affected by economic downturns than office rentals.

Klepierre and Unibail: the sectorÂ's stars
Analysts are particularly bullish on sector star Klepierre, pointing at its ambitious European shopping mall expansion programme. In July, Klepierre purchased 11 shopping malls owned by retailer Carrefour in Italy for 226 million euros, which the firm said would assure an initial net yield of 7.4 percent thanks to an annual rental income of 17 million euros.

The sale came in addition to a deal that provided for 160 Carrefour malls to be sold to Klepierre for 1.7 billion euros, 130 of which have been bought to this day. 'We are continuing the implementation of this programme and poor economic conditions are having no impact on the pace of our purchases,' a spokeswoman at Klepierre told Reuters, estimating the firmÂ's retail rental net yields at 6.4-7.1 percent.

'Klepierre is proving one of the more active companies in our universe, with an interesting development and acquisition pipeline that should support the cashflow growth,' Merrill Lynch analysts said in a recent research note.

This explains why Klepierre has outperformed Dutch peer Rodamco, EuropeÂ's leading retail property firm, whose shares have gained two percent so far this year, despite a more friendly Dutch tax regime, which can boost net yields on rental prices there to 5.0 percent against 3.0-3.5 percent in France.

Unibail is another French favourite, with first-half net profit that doubled on the year and targets for a 15 percent rise in pre-tax cashflow in 2002 and double-digit growth for the following years.

Still rising, but not as strongly as before
But even though real estate stocks still boast solid gains compared to the rest of the market, their performance has been curbed since June as deteriorating economic conditions took their toll on the buoyant property market. 'People may have been a little too optimistic in the first six months of the year and they are now slowly readjusting and see that the growth in rental prices is maybe not as rapid as they had h

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