Real estate : H1-20 results highlight tougher times for Retail REITs than for Office or Residential

H1-20 results show that the Covid-19 crisis already had a clear negative impact on REITs operating performance and portfolio values. As we had expected, the largest hit was on Retail companies, both on rental income and asset values while German residential companies were almost immune. Office REITs, mid-way , faced very limited impact from the crisis , although we still expect capital values to contract slightly in the coming month due to the economic recession and a higher unemployment. Retail : Retail sales in Europe have mechanically dropped with the lockdown of the population and the closure of non-essential shops. Footfall in shopping centres picked up strongly after the lockdown reaching -12% YoY in August in France according to CNCC. Retail REITs show disparities depending on the positioning of their assets in terms of format and geography. U nibail- R odamco- W estfield (URW) and Klépierre recorded tenants' sales down by -39.4% and -35% LFL in H1-20 as they are very diversified geographically , while the f a ll for Altarea, which operates mainly in France, was only -14%. In June, Carmila and Mercialys, whose centres are anchored to food retailers, respectively posted a -7.1% decline and a +0.6% increase LFL, vs. -19.1% for URW and -13% for Klépierre . However, the number of retailers going bust increased in Q2-20 (although many have been rescued), mainly in the fashion sector . Importantly, despite an average reduction of 70bp in H1-20, occupancy rates of retail REITs remain ed high at 96.2% on average at end - June 2020. In the context of the mediation between retailers and landlords, rent collection rate in Q2-20 was inevitably low for most property companies : 38% of invoiced rents for URW, 41% for Klépierre, 45.8% for Mercialys. That said, very little negotiations have been closed in H 1 -20 (25% for URW). Capital values of shopping centres have declined by -4.5% YoY LFL on average in H1-20 with Wereldhave experiencing the largest contraction at -5.7% and Klépierre -2.8% , Mercialys - 3.1 % , Carmila -3.2%, URW -5.2%. Office s: T he European office market has suffered a drop in take-up while vacancy rate s have increase d by c.35 bp . How ever , the rather prime positioning with top-quality client portfolio s prevent ed most office companies under our coverage from significant rent downside and their H1-20 resilient r esults outperformed the market . Rent collection rate remained very high in H1-20 with 96.4% for Covivio, 94% for Gecina, 99.2% for Merlin Properties, 86.5% for SFL. Therefore, r ental revenues remained up slightly YoY , with an outperform ance of portfolios more expos ed to CBD assets . Asset values of Office REITs remained roughly stable in H1-20 in line with the market trend . Gecina is leading the pack with a +4% LFL growth YoY in asset value s (+1% over H1-20 ) although reflecting a strong geographical disparity: +7.1% in Paris city v s. -7.6% in the rest of the Paris region . German residential: As we had expected, the current crisis had a very limited impact on companies focused on that segment in H1-20 (<1% of rents). Actually, the highest downside risk came from the rent freeze policy in Berlin. However, the likelihood of this law being deemed unconstitutional is increasing.