Europe’s Real Estate Could Offer a Buying Opportunity. These Two Stocks Have an Edge.

The outperformance could be due to its status as a haven investment. Rents are expected to be paid, and while the sector’s growth may slow, rent cuts and space reductions are unlikely, analysts say. Investors still need to be selective—the sector’s selloff has been indiscriminate even though few of the companies and REITs have direct exposure to Russia or Ukraine.

Shares of Capital & Counties Properties (ticker: CAPC.U.K.), a British REIT that owns prime real estate in central London’s Covent Garden, remain 9% below their January high, and analysts have an average price target of 1.95 pounds sterling ($2.55), implying a 16% upside from Thursday’s closing price.

“Despite recent geopolitical events, accelerating inflation and the looming cost of living crisis,” the company’s Covent Garden “retail offer is weighted to high-value luxury retail, which we expect to remain resilient,” says Berenberg analyst Kieran Lee, who has a £2.20 price target.

Barclays has an Overweight rating on the stock. The bank’s analysts said the company could potentially increase rents, given its high occupancy rates. Barclays sees 3% estimated rental value growth a year, up from a flat forecast. Real estate in London’s West End is perceived as a “storage of wealth,” which could make it a defensive play, analyst Sander Bunck says.

Capital & Counties swung to a net profit of £29.3 million in 2021, from a loss of £702.7 million the previous year as rental income rose. The valuation of its Covent Garden properties rose 4.6% on a like-for-like basis to £1.7 billion in the second half of the year, it added.

“Covent Garden is the most vibrant district in the West End and is well-positioned for further rental growth,” CEO Ian Hawksworth said when earnings were released last month.

Shares of British student housing developer Unite Group (UTG.U.K.) were hit hard during the pandemic as universities switched to remote learning. The stock is 17% below its prepandemic high. “We expect a recovery in earnings and dividends to levels ahead of FY2019 and a return to the historic trajectory of growth,” says Panmure Gordon analyst Miranda Cockburn, who rates the stock a Buy with a price target of £12.17. Unite has a “degree of inflation protection” through hedging of utility costs and fixed prices for development contracts, she says.

Analysts estimate Unite’s sales, or rental income, in 2022 could reach £240.5 million ($314 million), and £262.7 million in 2023, according to FactSet, up from £209.1 million last year.

Unite posted pretax profit of £343.1 million in the full-year 2021, up from a £120.1 million loss the previous year. Adjusted earnings rose 20% to £110 million.

The outlook for U.K. higher education is strong, and is driven by increased demand from returning students, Unite CEO Richard Smith said last month at the company’s full-year results.

Barclays analyst Paul May says that demand could be strong in a recessionary environment, which typically makes higher education more appealing.

“This counter-cyclicality is due to people seeing a difficult jobs market and deciding to stay in education for longer,” he said.

Write to Callum Keown at [email protected]