Franck Delage, Senior DirectorNicole Reinhardt, DirectorEMEA Real Estate (REITs)

Paving The Way For Renewed GrowthJuly 16, 2021

Key Takeaways

– The fallout from the COVID-19 pandemic has had a moderate rating impact so far, with six rating downgrades among the 61 real estate investment trusts (REITs) we rate.

– We expect an uneven recovery in the sector, taking longer in the retail and office segments than in residential and logistics.

– Although challenges remain for retail REITs, the reopening of shopping centers and the vaccination rollouts will aid the recovery.

– We expect the flight to quality to continue in the office sector, with green and prime assets in central locations faring better.

– The residential market is likely to remain buoyant, despite rising capex.

– Demand for logistics space should continue to outpace supply and support solid rental growth.

– REITs’ bond issuance hit new record high in H1 2021, mostly to refinance debt at a lower cost and fund external growth.

– We expect REITs’ credit metrics mostly to recover by 2022, with the debt-to-debt plus equity ratio taking slightly longer.

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COVID-19 | Moderate Rating Impact On REITs So Far

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Positive rating actions Negative rating actions % Negative (right scale)

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– 12 ratings actions due to COVID-19 out of 61 rated REITs.

– Six rating downgrades, Nine outlook changes.

– Most rating actions were on issuers in the retail segment.

– 50% of retail REITs were already on negative outlook before the pandemic.

– Today, 25% outlooks and CreditWatches on REITs remain negative (after a peak at 33%).

Rating actions are tracked from Feb. 3, 2020, to April 23, 2021. Positive rating actions are upgrades, positive CreditWatch placements, and positive outlook revisions. Negative numbers signify negative rating actions. Negative rating actions are downgrades, negative CreditWatch placements, and negative outlook revisions. Source: S&P Global Ratings.

Global Real Estate Ratings Versus Other Corporate Sectors Pandemic-Related Rating Actions On EMEA REITs

Our Assumptions For 2021-2022 | An Uneven Recovery

Property segment Key assumptions 2021-2022 (like-for-like) * Estimated time to return to 2019 level

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*S&P Global Ratings base-case assumptions on rated real estate companies operating in Europe, on average, as of July 15, 2021.

Net rental income: 0% to 5% in 2021 / 5% to 0% in 2022 Asset revaluations: -5% in 2021 / 0% in 2022

Retail2022 Beyond2021

Office Net rental income: 0% to -5% in 2021 / 0 to -5% in 2022 Asset revaluations: 0% to -5% in 2021 / 0 to -5% in 2022 2022 Beyond2021

Residential Net rental income: 0% to 3% 2021 / 0% to 3% in 2022 Asset revaluations: 0% to 3% in 2021 / 0% to 3% in 2022 2022 Beyond2021

Logistics Net rental income: 2% to 5% 2021 / 2% to 5% in 2022 Asset revaluations: 0% to 3% in 2021 / 0% to 3% in 2022 2022 Beyond2021

Retail | Reopening And Vaccination Will Drive The Recovery

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Rental Uplifts Decreased But Remain Positive Despite Negative Retailers’ SalesAverage 'reversion rate'/'leasing spread'/'MGR uplifts' reported by S&P-rated European retail REITs versus tenants' sales like-for-like growth

Sources: S&P Global Ratings, companies' reporting.

Rental Income And Asset Valuations Declined By 16% And 6% In 2020Reported like-for-like growth (%)

Sources: S&P Global Ratings, companies' reporting.

– Rent recovery could be modest in 2021, constrained by losses from deferred rents, increased vacancy and slow lifting of restrictions.

– Rent collection should recover more pronouncedly in Q3, after a relatively weak Q1 2021 despite ‘revenge’ shopping.

– Rental uplifts are lower than pre-COVID but remain positive in several European countries.

– U.K. issuers are facing more challenges than in continental Europe in rental income and valuation growth, while the Nordics are outperforming.

– Lease terms remain largely fixed in Europe (>90% rental income).

– Asset disposals are still subdued but close to, or slightly above, last appraisal values.

Key Takeaways

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Office | Prime Assets In Central Locations Should Recover Faster

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– Work from home will likely be adopted in hybrid mode, but workplaces may require more sqm/employee. Office space needs could be 10%-15% lower. Returns to offices could be uneven.

– Rental income should remain mostly flat until 2022, pressured by potential vacancy on maturing leases and softening market rents in most supplied areas.

– Flight to quality. Rising demand for service-oriented grade-A assets, with a higher proportion of collaborative spaces and green credentials.

– Central versus decentralized locations. Preferences for central business districts are becoming more visible (rent reversions, price premiums, valuations)

– Lease terms are broadly unchanged, with no shortening. Options for subleasing could increase but remain highly conditioned.

– Investment market is slowly resuming, sales still close to premium to last appraisal value (~3%-7% premium).

Key Takeaways Returns To Workplaces After First Lockdown Wave Were Uneven In Europe Percentage of workers that have returned to the office

11% Of Leases Mature In 2021 In EMEA, But Only <5% Remain At RiskPercentage of annual rent coming to expiry or break option

Sources: S&P Global Ratings, Morgan Stanley Research.

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Data represents a simple average from the rated entities in the respective gateway cities. Tokyo data is an estimate. Source: S&P Global Ratings. Source: S&P Global Ratings.

Residential | German Market Remains Buoyant Despite Rising Capex

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– The pandemic’s effects have left the German residential broadly unfazed in terms of rent collection, payment defaults, occupancy rates.

– Tenant demand should largely outpace rising development activity, owing to the structural shortage of housing.

– Affordability issues may still lead to regulatory changes and reputational risks, despite the recent cancelation of the rent cap (‘Mietendeckel’) law in Berlin.

– Growing environmental requirements imply rising capex for landlords. They nevertheless remain manageable for S&P-rated issuers.

– Low property yields could constrain direct acquisitions and favor development as the growth engine for REITs.

– More M&A remains likely, as share prices continue to trade at or below NAV despite positive market fundamentals.

Key Takeaways Greenhouse Gas Emissions From Buildings Are Set To Decrease(mil. tons/year)

Amount Invested In Construction Capex Is IncreasingConstruction capex (mil. €/year)

Sources: BMU, DB Research, S&P Global Ratings.

a--Actual. e--S&P Global Ratings' estimates. Sources: S&P Global Ratings, companies' reporting.

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Vonovia SE Deutsche Wohnen SE Adler Group S.A.

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Logistics | Demand Should Largely Outpace New Supply

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– The pandemic has accelerated the growth of e-commerce. Higher corporate inventories boosted the need for logistics space.

– Rents should continue to expand, despite a significant rise in new supply across Europe. Net absorption remains comfortably positive.

– Urban localization and “last mile delivery” type of assets should remain in high demand to address the need for faster deliveries.

– Vacancy should remain at historically low levels in Europe, close to 4%.

– Asset valuations should stay positive this year, supported by record investments (H1 2021 was the highest Q1 ever), especially in Sweden and the UK.

– Yields for prime logistics assets should continue to decrease, and catch-up with prime retail assets, which by contrast are rising.

Key Takeaways Ecommerce Should Continue Rising Significantly In The Next 4 YearsRetail ecommerce sales in Western Europe projections (bil. €, equivalent; share of total retail sale, %)

Projections by eMarketer as of May 2021, excludes travel and event tickets, bill pays, taxes or money transfers, food services and drinking place sales, and gambling. Source: S&P Global Ratings.

Tenant Demand Continues To Outpace Supply of New Logistics Assets in EuropeCompletions, take-up, and vacancy (mil. metre sq; %)

Sources: S&P Global Ratings. CBRE EMEA Industrial & Logistics Leasing Market Snapshot Q1 2021.

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Debt Issuance In 2021 | Strong Liability Management

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– Bond issuance by European REITs hit new records in H1 2021( about €30 billion rated by S&P Global Ratings).

– Market conditions in 2021 support strong liability management efforts (longer maturities at lower coupons).

– M&A is also boosting debt issuance.

– Bond market remained accessible during most of the pandemic in all property segments

– Issuers’ liquidity positions have improved. The liquidity multiple for retail S&P-rated REITs was 2.7x as of Dec 31, 2020 (versus 1.9x as of Dec. 31, 2019).

ytd—Year to date. Source: S&P Global Ratings.

Back To Lower For LongerAverage maturity and coupon on new issuances by S&P-rated REITs in EMEA, excluding perpetualsAs of June 30, 2021

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Debt-To-EBITDA Should Recover From Covid-19 In 2022S&P-adjusted debt-to-EBITDA ratio, average of S&P-rated REITs in EMEA (x)

Credit Metrics | Most Will Recover By 2022

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f--S&P Global Ratings' forecast. EMEA REITs--average of S&P rated REITs in Europe excluding 3 outliers. *base case assumptions as of November 2019. Source: S&P Global Ratings.

Interest Coverage Will Remain StrongS&P-adjusted EBITDA-to-interest ratio, average S&P-rated REITs in EMEA (x)

Debt-Debt+Equity: Back To The 10-Year Historical Average S&P-adjusted debt-to-debt & equity ratio, average of S&P-rated REITs in EMEA (%)

– Interest coverage did not deviate much and should remainstrong thanks to low interest rates.

– Debt to EBITDA should recover by 2022, owing to lowerinvestments and dividends.

– Debt-to-debt plus equity should plateau at the 10-year average level, owing to asset devaluations

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Looking Beyond | What Could Change Our Assumptions?

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A significant virus resurgence in Europe and/or delay in normalization of the health situation.

An unexpected hike in interest rates and/or more pronounced revaluation decline.

Stronger inflation than expected.

Strongly positive rental uplifts on lease renewals.

Real Estate | Our Latest Research– Industry Top Trends Update: Real Estate (REITs) – Paving The Way For Renewed Growth, July 15, 2021

– Nordic Property Companies And Banks Can Cope With Mixed Market Conditions In 2021-2022, May 20, 2021

– Property In Transition: Zooming In On The Global Office Reboot, May 6, 2021

– European Office REITs Should Prove Resilient To A Gradual Decline In Tenant Demand, April 29, 2021

– Berlin's Rental Revenue Prospects Rise After Germany's Highest Court Overturns Rent Freeze, April 16, 2021

– Can European Retail Property Owners’ Belt-Tightening Save Ratings From COVID And E-Commerce Headwinds?, March 31, 2021

– Russia’s Housing Boom Isn’t Likely To Burst—Or Bust, March 19, 2021

– As European Hotels Grapple With Prolonged Restrictions Are Operators And Landlords Sharing The Pain?, Feb. 25, 2021

– Industry Top Trends 2021- Global REITs : Recovery In The REIT Sector Could Be Long And Uneven, Dec. 10, 2020

– Industry Top Trends 2021 – Global Homebuilders and Developers: Credit Quality Improvement Continues Into 2021, Dec. 10, 2020

– German Residential Real Estate Is Unfazed By COVID-19, Nov. 30, 2020

– COVID-19 Is Only Part Of The Threat Facing U.K. Real Estate Companies, Nov. 16, 2020

– Bearish Equity Market Sentiment Adds To European Real Estate Companies' Credit Risks, Oct. 9, 2020

– European Office Real Estate Companies: After A Resilient First Half Upcoming Lease Maturities Should Test The Market, Sept. 18, 2020

– European Retail Property Companies First Half Results Highlight Looming Risks, Sept. 3, 2020

– European Corporate Credit Mid-Year Outlook 2020: Real Estate (REITs), July 16, 2020

– European Corporate Credit Mid-Year Outlook 2020: Homebuilders and Developers, July 16, 2020

– COVID-19 Accelerates Structural Shifts In Global Office Real Estate And REITs, June 9, 2020

Available on www.capitaliq.com

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Analytical Contacts

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Franck DelageSenior Director & Sector Lead

+33-1-44-20-6778

franck.delage@spglobal.com

Nicole ReinhardtDirector & Lead Analyst

+49-693-399-9303

nicole.reinhardt@spglobal.com

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