European REITs: Finding resilience in a stressed sector

Key takeaways

• The 2022 rate shock triggered a broad sell-off in European REITs, creating opportunities where market pricing became overly indiscriminate.

• Bottom-up credit research helped identify issuers whose balance sheet strength and self-help potential were not fully reflected in valuations.

• Our case study highlights how active security selection can uncover mispriced opportunities and generate alpha during periods of market stress.

Few sectors felt the rapid rise in interest rates in 2022 more acutely than European real estate. As spreads widened sharply, much of the market treated the sector as a looming fallen-angel problem.

Our credit team took a different view. Rather than treating European REITs as a single distressed trade, we focused on separating issuers facing genuine balance-sheet and business-model pressure from those whose fundamentals remained considerably stronger than market pricing implied.

This distinction mattered. The opportunity was not simply to buy the sector after a broad sell-off. It was to use our fundamental credit analysis to identify where temporary or cyclical pressure had been mistaken for permanent impairment.

Cheap funding met a rapid rate reset in 2022

For much of the decade following the global financial crisis, European real estate benefitted from an environment of exceptionally low interest rates, as abundant and inexpensive financing supported M&A and balance-sheet growth within the sector.

But in 2022, when many REITs issuers had already levered their balance sheets significantly, they were hit with a sudden spike in interest rates following the outbreak of the Russia/Ukraine conflict. At the same time, yields from rental income were not adequate to compensate issuers for the increased refinancing risk and, combined with falling property valuations, this led the market to shine a spotlight on the sector. 

Credit spreads widened dramatically, and the sector suffered a repricing of more than 200 basis points (bps) from the start of the year to the peak of the market stress. 

European REIT spreads widened sharply as rates reset

Source: Bloomberg, from 1 July 2014 to 10 August 2026. Index: Bloomberg Pan-European Corporate: REITs Index Total Return Index.

Against this backdrop, our European Credit Research team focused on identifying where market pricing had become overly indiscriminate.

We started by assessing whether the risks implied by market pricing were consistent with the issuer’s underlying fundamentals. Our analysis focused on leverage, liquidity, refinancing needs, asset quality and the company’s ability to generate or release cash.

We also engaged directly with management teams to understand the actions available to them and their willingness to protect the balance sheet. This work helped us identify where market concerns were overly pessimistic, while avoiding situations where deteriorating fundamentals were likely to result in permanent impairment.

When market dislocation creates a selection opportunity

Applying this framework revealed significant differences within the sector-wide sell-off. Residential and logistics property stood out as areas supported by stronger structural fundamentals, while parts of the office market faced more significant challenges.

Not all widening spreads represented an opportunity. The team’s analysis highlighted caution on issuers where refinancing pressures, concerns around leverage or structural weaknesses were not adequately reflected in valuations.

Based on this analysis, our fund managers selectively added exposure to issuers including Aroundtown¹ and BPP ², followed later by DVI ³. In each case, the team believed that improving fundamentals and credible balance-sheet repair were not fully priced in by the market.

The team also found value in higher quality issuers where management teams had demonstrated a clear commitment to maintaining their investment-grade ratings through equity issuance, asset sales and leverage.

Aroundtown: A case study in market dislocation

Aroundtown provides a clear example of how bottom-up analysis can uncover attractive risk-adjusted opportunities during periods of market stress. As spreads widened in 2022 and 2023, the market focused on the company’s high debt burden and questioned whether its management would prioritise shareholders over bondholders. The market increasingly priced the company as a fallen angel candidate.

Our analysis led us to a different conclusion. Through detailed financial analysis and engagement with management, we concluded that the market was underestimating management ability, willingness and flexibility to take the necessary action to protect the balance sheet.

This view was subsequently validated. From 2023, the company paused dividends, tendered debt and continued asset sales. These actions supported bondholder outcomes and, as confidence in the credit story improved, drove a material tightening in spreads from over 800 bps in March 2023 to around 100 bps by December 2024. 

Aroundtown spreads tightened as balance-sheet actions gained credibility

Source: Bloomberg, from 31 December 2021 to 31 December 2024. Euro IG Index: Bloomberg Pan-European Corporate Index.

Aroundtown was not simply a bet on a recovery in European real estate. Rather, it reflected our analysts’ conviction that market pricing had become disconnected from the company’s capacity for self-help and management’s willingness to protect the balance sheet.

This approach allowed our team to generate alpha both through selective exposure to resilient issuers and by avoiding areas where refinancing and structural risks remained elevated. This approach is at the heart of active credit research.

Spreads have compressed – but selection still key

Fast forward to today, and the broad valuation opportunity has narrowed, as spreads have normalised across the sector and valuations are no longer as obviously dislocated. Balance sheets are stronger, refinancing pathways are clearer and rental growth remains resilient, at least in certain segments. That said, issuer and security selection remain critical.

The European REITs experience reflects the core philosophy behind Vanguard's active credit approach. Thorough our bottom-up fundamental research, we seek to identify differentiated views and to translate them into portfolio decisions. Rather than relying on broad directional market moves, our portfolios are instead deliberately constructed from individual investment opportunities with the aim to generating consistent long-term alpha for our investors.

¹ A Luxembourg-registered REIT investing in commercial and residential properties in central locations in European cities, primarily in Germany and the Netherlands.

² Blackstone Property Partners.

³ A German REIT investing in long-term residential and commercial real estate.

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